Market Trends for September 2019

"As Bad As it Gets"...

Back when the Trend Barometer was designed we decided to put some "lables" on different levels of the Trend Barometer. For example if it recorded a strength between 50 and 60, we would label it "GOOD" and above 60 it would be described as "VERY STRONG". We also decided to label a low strength between 20 and 30 as "VERY WEAK" and anything below 20 as "AS BAD AS IT GETS".

And from the title of this post, you probably guessed it by now...that's what we got in September...

September was a month full of corrections and surprises in global markets as easing U.S.-China trade tensions and evidence of continuing U.S. economic growth resulted in a fierce unwind of risk-off positions that had performed well in previous months. Add to this an attack in Saudi Arabia that sent chock-waves through the energy markets producing some severe price spikes across the entire complex...also against the direction of the longer-term trend. So needless to say, it was a challenging month for trend followers.

But lets just be clear about one thing...those shorter-term strategies that claim that trend following is too crowded and too slow and does not deliver enough convexity...did not do much better than their trend following cousins...and have certainly not delivered nearly the same return so far this year.

Sure, we all knew that at some point bonds would stop going up and have a decent correction...but let's not forget that many people thought the same two years ago. The truth is that investors should have a bit of both...but if you can only pick one...I know which one I would go for :).

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a "as bad as it get" level of just 18, which suggest a quite negative month, when it comes to performance of trend following strategies...and that seem to be exactly what we will get when the numbers are in.

It's not often we see such a low reading but it does happen and let's not forget the long winning streak that trend following strategies have been on so far this year...that is also unpresidented.

The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors:

The number of markets recorded in a trending state at the end of the month dropped to 7...down from 23 in the previous month, and even if we include those ending right at the neutral reading (indicated by the "grey" shade right at the 30% level) we only get up to 8, which puts the Trend Barometer in pretty weak territory. Please note that for the individual markets a reading of 30 is considered neutral as opposed to the Trend Barometer itself, where this level is 45.

In the RED camp (down trends) this months, we the Euro stood out as being in the strongest down-trend with the Swiss Franc and Aluminum on joint second place. Carrying the GREEN flag (up trends) at the end of the month we see Palladium matching the strength of the Euro (but in opposite direction), with the Nikkei, SMI and Lead making up the rest of this group.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state vanished from 6 to 0 out of 10 sectors. Last month was the strongest reading in terms of number of Sectors I have seen in many years...this month is surely the weakest.

In some ways it is reassuring to see how well the trend barometer visualize the shifts in market trends which then corresponds closely to the performance of the strategies relying on medium to long-term trends.

October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.

That was a legendary Mark Twain quote to remind us to live in reality and not in the sensationalized world portrayed by others. Stay focused and follow your rules.

And speaking about rules...legendary trend follower Larry Hite just released his book called The Rule...and here is a quote that caught my eye, to set you up for the final quarter of the year.

My rules of thumb for a crisis are no different than our historic approach to risk management:

• Use the worst-case scenario as your baseline. I always want to know what I’m risking, and how much I can lose.
• Be prepared to lose capital that is subject to market volatility. You alone control how much of your limited supply of money you are willing to lose. Never expose more of your pile to volatility than you can afford.
• Be prepared to lose roughly the size of your annual return. For example, a strategy with a 10 percent return over time should be expected to suffer at least double the annual return in a 20 percent drawdown—so a strategy with a 30 percent return over time should be expected to suffer a 60 percent drawdown.

Finally, isn’t it true that you make better decisions in any kind of crisis when you are not worried about your own financial survival and the terrible pressures of those feelings? You can’t make rational decisions when you have an unhealthy fear of the risks involved.

Always, always identify the worst that can happen and change your behavior to protect yourself and maybe your family.

If you want to check the current state of trend following, join me each weekend on The Systematic Investor Series, where we give you a raw and honest account of what it's like to be a rules based investor and share with you which trends are happening right now.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

I hope you found the information useful as part of your own evaluation of the trend following part of your investment portfolio. I will continue to do my best to keep you up-to-date with regards to the environment for diversified trend following strategies and would love to discuss any of this information with you. Just reach out to me.

P.S. if you want to follow the Trend Barometer on a daily basis, please click here and if you want to see the list of Market Symbols explanations, please click here.