markets

HOPE is a Powerful Force, but so is The FOURTH Turning

For many years, the CTA Industry has pilgrimed to Miami each January. More specifically to the Fontainebleau Hotel in South Beach. This week the Wall Street Journal reported that this iconic hotel has asked for “forbearance” on millions of dollars of interest payments on their near $1bn worth of bonds due to “potential cash flow concerns”. With Optimism still high in the financial markets they probably will be given more time.

Decades of solving debt issues both in the private and public sector with even more debt, continues to fuel Hope & Optimism in the markets. In the second quarter, the US Government will borrow $4trillion, which is 3.5 times the prior record, made in the second quarter of 2008. And US Corporations are not too far behind. In the first five months of this year, investment-grade companies took on another $1 trillion in debt, by far the most in history. Oh…and Argentina just defaulted for the ninth time. But there seems to always be an optimistic creditor willing to “lend a hand”.

In May, Hope & Optimism continue to drive asset prices higher (together with the rapidly growing FED balance sheet, now topping $7trillion for the first time ever). Not only did this help equities continue to recover towards their old all-time-highs, it also propelled some sectors of the bond market to optimistic extremes, such as short-term muni yields, which are near 0%.

Another sector is the junkiest of junk bonds. These are bonds of companies with the worst credit structures who have a high likelihood of bankruptcy. No worries: These bonds, with seriously low ratings, had the best total return in the month of May within the junk bond sector. Only in an environment of excessive optimism would investors see fit to bid up the bonds of companies that are on the verge of collapse, but that they “hope” won't.

Hope seem indeed to be the fuel of what is currently happening in the markets, seducing investors to ignore much of the data. For example, on Friday the Atlanta Fed cut its real-time GDPNow indicator to minus 51.9% annualized for the second quarter from a prior estimate of a 40.4% decline.

In addition to the explosion in unemployment around the world, President Trump speaking from the Rose Garden, turned up the heat in the cold war with China, who this week approved a new security law for Hong Kong which will place mainland security forces in Hong Kong for the first time since the the UK handed it over in 1997.

BUT the Hope and Optimism we currently see, is not unusual. In fact you could say, it's very predictable. You see, as Neil Howe explained in his book The Fourth Turning, every generation moves into a new phase of life about every 20 or 22 years that pushes society into a new social mood and so if you think of four basic generational archetypes each about 22 years long the total “cycle” is about 90 years.

We are currently in a Fourth turning and fourth turnings is when we suddenly realize that that kind of world is not meant for survival and that we suddenly need order. We want direction, we need authority and we are usually shocked into that realization by a catalyst that suddenly plunges the world into a very negative mood. Suddenly big institutions particularly individualistic market institutions no longer seem to work anymore.

In fact, some of the big catalysts were great stock market crashes like 1857, 1929 and sooner or later they ultimately took the world into great Wars historically.  According to Howe, this latest Fourth turning started around the time of the Great Financial Crisis (2008-2009) and he thinks we're gonna be in it all the way until around the year 2030, so a good 22 years, and by the way…back in 1991 he wrote a cover story for American demographics in which he predicted America was headed for a great crisis right around 2020…so I think its worth paying attention to what he says.

We don't know how all of this turns out, but having a healthy allocation to a strategy that does not rely on an orderly, nor predictive outcome given all this uncertainty…seems like a good idea.

Now let's dive in to see how the trends developed.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a very low level of 23, reflecting well all of the trend reversals that we saw in May.

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 halved to 7…down from 14 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 10, which leaves the Trend Barometer in a NEGATIVE state. 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 find Coffee, SoybeanMeal and Nat Gas. Carrying the GREEN flag (up trends) at the end of the month, we find Short Sterling, Nasdaq, Nikkei and Silver.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, plunged from 3 to 0 out of 10 sectors. So again confirming the transition or correction phase most markets are finding themselves in at the moment.

As mentioned above, the world could well be entering a difficult time, that will last for a whole decade. This does not mean that markets won't trend. On the contrary, I think we could well see the return of much higher general volatility and sustained market trends.

But if we do, the importance of having a truly diversified portfolio can not be overstated and it is my guess that divergent strategies, such as trend following will be one of the most important components of such truly diversified portfolios.

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.

When You Have No Idea What Happens Next

After a nail biting month of March, April was full of surprises…and of course a “never before in history” event, when we saw Oil prices go Negative. And that is actually the point I want to emphasize this month.

How many times in the past 6 weeks have we heard the words “first time in history that this has happened”? Quite a few.

So when I read the below article by Morgan Housel, I felt compelled to share it with you as he once again so elegantly describe the importance of having an investment strategy that does not try to forecast or predict in your portfolio. Please read this short post:

“When You Have No Idea What Happens Next”Do we know more about what’s going to happen in the next 12 months today than we did in January?

You’d think so. We now know there’s a pandemic that shut the economy down. We didn’t know that in January.

But remember what Daniel Kahneman says. “The correct lesson to learn from surprises is that the world is surprising.”

The things we thought about the world in January now look oblivious. But what does that tell us about our view of the world today?

Couldn’t the world change in as surprising a way between April and June as it did from January to March?

Of course it could. That should be the main takeaway of 2020.

We’ve learned this year that assumptions you have about the future can be destroyed overnight. That’s true for the poorest to the most successful, the old dry cleaner to the tech startup. It was true in January, and it’ll be true again in the future. Things change.

If that’s the lesson, the question is: what do you do about it? How do you think about a world where fundamental assumptions about the future are so fragile?

“Humbly and with fingers crossed” is the answer. But two other ideas:

1. Read more history and fewer forecasts.

Studying history can feel like intellectual candy that offers no practical use to investors who are paid to foresee the future. But once you accept how fragile our assumptions of the future are, you realize that forecasts are the real fluff and history is where the meat is.

Think of all the 2020 market forecasts published in December. Oof. Authors of these reports – most of which have been quietly removed – might say, “I couldn’t have foreseen Covid-19 in December, and it upended my entire forecast.” To which my response would be, “Yes, that’s my point.” If you claim an ability to foresee events, you can’t use events you didn’t foresee as an excuse – especially when unforeseeable events move the needle most. When a company reports poor earnings it’s often said they missed analysts’ estimates. But earnings don’t miss estimates; estimates miss earnings.

Accepting that forecasts have little use doesn’t mean you become a blind fatalist. When you pay more attention to history than forecasts you pick up on the patterns that guide how people respond to unforeseen events, which – given how stable behavior is over time – is the next best thing to knowing what will happen next.

I don’t know when this recession will end, and I’m not interested in your forecast. But I am interested in the historical observation that progress happens too slowly for people to notice but setbacks happen too quickly to ignore, which causes most people to recognize when a recession ended only with considerable hindsight, which requires maintaining investing optimism even when the economy around you feels broken.

I don’t know exactly what companies will survive or perish from this mess, and neither do you. But I know that, historically, it’s normal for the majority of the investments you make to perform poorly while a small handful do extraordinarily well and drive the majority of returns – a truth that’s mathematically obvious but psychological torture to deal with in real time. Knowing that fact alone can be more valuable than listening to someone who professes to know what companies will die or thrive. And you learn it by paying attention to the enduring themes of history rather than the alluring promises of forecasters.

2. Have more expectations and fewer forecasts.

If I say, “The next recession will begin in 2024,” I’ve made a forecast.

If I say, “Recessions occur roughly every 5-10 years,” I’ve expressed an expectation.

They seem similar, but they’re very different.

Forecasts rely on knowing when something will occur. Expectations are an acknowledgment of what’s likely to occur without professing insight into when it will happen.

Expectations are healthier than forecasts because they provide a vision of the future stripped of all false precision. If you know a recession will occur at some point, you won’t be that surprised whenever it arrives – which is a huge benefit. But if you assume you know exactly when it will occur you’ll be tempted into all kinds of dangerous behavior, leveraged with overconfidence. And you’ll be shocked when time passes and what you thought would occur hasn’t happened (yet).

Here’s a useful expectation: assume the world will break once or twice per decade. I don’t know where, or when, or how, who it will affect. But when you expect the world to break every once in a while you prepare for events you can’t foresee and you don’t have to rewrite your playbook when they happen. You’ll prefer big cushions and room for error. When people ask, “What are you preparing for?” you’ll say, “A world that history shows is both a growth machine and a continuous chain of unforeseen agony.” A world where we have no idea what will happen next. Nothing more specific.

What a beautiful way to remind all of us, that we need a boldly sized allocation to strategies like Trend Following.“No Earnings…No Problem”

If you just looked at the strong rebound it equities since March 23rd and the reversal of the strong down trend, you probably wouldn't think that some of these companies will be reporting Q1 and later Q2 results that will show vastly lower earnings than only 3 month ago. Clearly the bulls have found every excuse to buy stocks in the past month or so, helped by the ever growing Reserve Bank credit (i.e., the Fed’s sum total of interest-bearing assets) which jumped to $6.598 trillion.

But as far as I know…this is not unusual…because even during bear markets, you often see more up-days than down-days. That is what makes it so hard to trade in a bear market…that is, if you are not rules-based.

But stocks was not the only sector that had a strong rebound from its lows. Energy also saw some incredible (in percentage terms) up moves in the past couple of weeks, after the May Crude Oil contract went negative. Oh yes, we had another of those “first time ever in history” events in April. Perhaps the rebound is linked to the amount of money flowing into the 2 largest OIL exchange traded products and EFTs, which is a way for retail investors to buy “cheap” oil.

Now let's dive in to see how the trends developed.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a slightly below average level of 39, which follows two really strong readings in February and March.

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 halved to 14…down from 27 in the previous month, and if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 17, which leaves the Trend Barometer in a NEUTRAL state. 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 find most of the trend markets and all of them being from the Commodity part of the portfolio…perhaps indicating the risk of Deflation. Carrying the GREEN flag (up trends) at the end of the month, we only find some Fixed Income markets, and mostly the Short-Term Interest Rates.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, decreased from 4 to 3 out of 10 sectors. But we did have the Grain Sector bordering a trending state, so perhaps we call it unchanged this month.

I think what we are witnessing in markets like crude oil has more profound implications for other financial markets than most investors realize.  From their year-to-date highs, crude oil and US stocks paint remarkably different pictures of how bad things are in a COVID-19 world characterized by social distancing and isolation, lockdowns, fear, distrust, economic dislocation, and tremendous uncertainty about the future.  Crude oil's decline in the May contract ended up being more than 100%.  The story crude is telling is that demand and overall economic activity has collapsed, and that financial disaster seems both likely and imminent.

By comparison, the US stock market, even with the last two days of declines, seems positively sanguine.  The Dow is down less than 15% from its February highs and is actually UP more than 25% from its March lows.  Indeed, the total decline from all-time highs at this point in the Dow is roughly equivalent to the maximum losses that occurred in the fourth quarter of 2018, during which the US economy never even hiccupped in terms of growth.  The stock market, to date at least, is telling investors that it expects business as usual to prevail in both the global economy and financial markets by the end of the year at the very latest.

It is most improbable that the worst is behind us.  The “jab” was financial markets realizing (belatedly) that COVID-19 was a global pandemic.  But the “hook” will be when we see the worst global economic figures ever reported over such a short duration, and the subsequent realization that the severe magnitude of economic and financial market contractions will be self-reinforcing, causing an almost inevitable cascading downward of total economic activity.

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.

There are Decades where Nothing Happens, and then there are Weeks where Decades Happen?

In my February update, I wrote about the three things that is usually present for a Crisis to happen (Excessive Valuations, a Trigger & Change in Investor Sentiment/Human Behaviour), but little did I know that this would be evident just 31 days later.

Last night the S&P 500 wrapped up a 12.5% drop for the month of March and 20% first-quarter tumble for the broad index…and that is not even the worst of the major stock indices. For those who want to try and ease the pain of this number, you can of course compare it to the 66.5% drop in Crude Oil prices in Q1. One of few positive numbers when it comes to Q1 is the 241% gain of the VIX index.

But allow me to go back to the point above concerning Change in Investor Sentiment/Human Behaviour.

Behavioral economists have noted that humans do not assess gains and losses in a symmetrical manner . That is, the emotional magnitude of the pleasure of a $10,000 gain is less acute than the pain of a $10,000 loss. But due to recency bias, during raging bull markets of a long enough duration, US stock investors tend to put out of their minds a period like late 2007 through March of 2009, during which they lost roughly 50%. The sting of those losses has been replaced by what appear to be the easy and durable gains occurring over the past decade. Sure, there were bumps along the road, but nothing even totaling a 20% loss.

However, when markets enter freefall – as has occurred for the five weeks following the market’s February 19th peak, in which the S&P 500 declined an astonishing 35% (!) – this is the sort of jolt from which people sober up. The cold realization may set in that it now takes a 50+% gain just to get back to even. Under these circumstances, it would seem impossible that there would not be some damage to investors’ collective psyche. Where there had formerly been nothing but complacency and confidence, now doubt and uncertainty reside. Collectively we may begin to wonder: will things get worse, perhaps much, much worse before they get better?

Market participants are currently in the midst of a grand-scale prisoner’s dilemma in which one’s financial security is tied to whether the other participants will “defect” by exiting the market, thereby driving down share prices further . Faced with these prospects, “defection” may appear increasingly attractive, causing a cascading effect.

But there is another element to consider. In certain circumstances, fear is not only a valid emotional response, but it can be the salutary impetus for self-preservation. Walk too close to a sheer ledge with no barrier and instinctively one veers away from it lest a slight stumble lead to personal calamity.

At present, the S&P 500 is down more than 20% from its zenith just weeks ago. Nevertheless, based on historically reliable valuations measures, it is roughly as excessively valued as it was at the peak of the bubble prior to the Global Financial Crisis (GFC), during which it would lose 55% of its value.

So, if investors know that economic activity in the second quarter will contract more than at any time in modern history, does it make sense to be courageous and stay in a market that has only been more overvalued in 1929 and 2000? Or does it make more sense to use this rebound to further reduce exposure to stocks and other risk assets?

Only time will tell.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a strong level of 64, which follows and even stronger finish last month, illustrating well how many markets have reacted strongly to the fear of what the fallout will be of COVID-19 on the world economy.

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 eased a bit to 27…down from 29 in the previous month, and if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 28, which leaves the Trend Barometer in a strong overall state. 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 mainly have Energy, Equities, Base Metals, Meats and a few other Commodity markets, with Sugar trending down the most. Carrying the GREEN flag (up trends) at the end of the month, we are not surprised to see Fixed Income markets as pretty much the only markets in an up-trend.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, decreased from 7 to 4 out of 10 sectors. This is the highest number we have seen for years, and may indicate the beginning of a new more volatile period ahead.

I ardently believe that very few people, whether they be in government, business, or financial markets, are seeing this crisis holistically, and as a result most are massively underestimating the financial market damage that is likely to ensue.

In a vacuum, were we to have what looks to be the greatest global economic shock since well before I was born, it would be devastating. But it would also be something from which we could expect financial markets to quickly recover. But now consider that prior to COVID-19 appearing, financial markets would have had to fall by in excess of 60% just to get back to historical average valuations. And, of course, we must factor in record corporate leverage in an era in which revenues are going to fall off a cliff for most, and profits will turn to losses. Finally, we must consider how likely it is that financial actors will avoid fear and the very logical tendency to financially “turtle up” when facing what will likely be both the greatest economic shock and epidemiological threat in the last one-hundred years.

So as usual I pose the question. How will investors protect their portfolios in a world of no/slow growth and interest rates at or below Zero?

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.

A Black Swan in the making?

Last Sunday as I was sitting on a train headed for Geneva to attend a few meetings, many global equity markets had just finished the week at or close to new highs. After a day in Geneva, and a quick return to see the family, my plan was to jump on another train to Milan for another two days of meetings. BUT Sunday night I spoke to a friend of mine who said, “Have you seen what is going on in Northern Italy, with the coronavirus?”. I hadn't but quickly realized that the outbreak was no longer contained to Asia, in fact it was only a few hundred kilometers from where I was sitting.

We all know what happened in the financial markets during the last week of February. And in fact, the drop in the S&P in the last 7 trading days is the fastest drop larger than 10% from a new high in history. But it's not the only records that were set this week. Interest rates on US 10-year bonds, declined another nearly 25% to hit an all-time low of less than 1.13% (30-year bonds also made new record lows).

This is important, as it sends a very different message than that of equity markets recently hitting valuation highs not seen in at least twenty years. The bond market is saying that economic growth and activity is going to be so muted over the next ten years that a mere 1.13% yield will be a fair return on investment!

The question on many investors minds after this week, is likely to be…”Is this the beginning of a much bigger crisis or crash of the world economy?”. Most severe financial crashes have three requirements:
1. Hyper-valuation;
2. A catalyst; and
3. Investor sentiment changing from greed/complacency to that of fear.

I won't debate here point 1 & 2, but point 3 is in my view the most interesting.

This is the risk that fear will replace greed and complacency. It is this risk that I think could be widely underappreciated.

Importantly, fear, just like the greed and complacency that precede it, can feed on itself and become a self-fulfilling prophecy. For one, the coronavirus makes people fearful of travel. Due to this, millions of businesses around the world, both large and tiny, will be hit hard economically…and so the spiral begins (potentially).

So looping back to where this email began, I too got concerned about my own travel and decided not to go to Milan this week…which in hindsight looks like a good decision. And as the coronavirus spreads here in Europe, it may not be the only trip I decide to postpone.

The above is not meant to be a prediction of what will happen, but only a reminder to encourage you to think extra carefully about your current investment portfolio.

Data suggests that most large investors (such as US Pension Funds) have significant equity exposure (70+ percent) and with the trillions of dollars now passively tracking equity indices around the world one must wonder what the underlying investors are thinking right now and if massive liquidations could lead to further declines.

And so the question that all investors should ask themselves (in my humble opinion) is: “What do I have in my portfolio that can make money if we get a new long-term crisis?”

As many of you know, investors have in recent years sold their hedge funds and CTA's in order to make more room for equity-linked exposure, such as illiquid Private Equity commitments. And I can't help think if they have managed to do this, just before they need them the most? If so, it wouldn't be the first time.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a very strong level of 77, a level we have not seen for a long time, illustrating well how many markets have reacted strongly to the fear of what the fallout will be of the coronavirus on the world economy.

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 surged to 29…up from 23 in the previous month, and if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 34, which leaves the Trend Barometer in a very strong overall state. 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 mainly have Energy, Equities, Base Metals and a few other Commodity markets, with Live Cattle trending down the most. Carrying the GREEN flag (up trends) at the end of the month, we are not surprised to see Fixed Income markets dominating the small group of markets in an up-trend.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, jumped to 7 out of 10 sectors. This is the highest number we have seen for years, and may indicate the beginning of a new more volatile period ahead.

The loss of momentum in many leading economies, monetary restraint, high debt levels, flat profits and excess capacity – will bring about slower growth and continue to subdue core inflation in 2020. But perhaps the key factor to look at is the volume of world trade. Since 1980, we've had four recessions, and only two of those recessions did World Trade Volume decline, in the devastating days of 1982 and then again of 2009. The volume of world trade did not decline during the 1990 recession or the 2001. It came down close to zero, but it did not decline. Last year, for the full year, we had a decline of five tenths or six tenths of a percent.

The reason that this is so important is that traditionally, World Trade Volume is above the rate of growth in GDP, it's world trade that connects the disparate units of the global economy and allows the global economy to expand. World trade is contracting and the IMF and others are still saying global GDP is 2.5% or something. And let's not forget…events of the past 3 to 4 weeks are not even in the data yet. Just imagine how economists will react when we see the updated data.

So as usual I pose the question. How will investors protect their portfolios in a world of no/slow growth and interest rates at or below Zero?

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.

New decade starts with risk of War & Virus

I could hardly believe my eyes when I sat down to write this update, only to find that despite geopolitical tensions following the killing of a top Iranian General and the outbreak of the Coronavirus, the Trend Barometer had not changed from December 31 to January 31.

Of course, intra-month it did move around…but it seems like it's trying to suggest that the trends that were in place at the beginning of the year, may still be intact, despite the increase in volatility during the last 10 days of the month.

Global stock indices battled to stay above water in a month of flaring tensions and fears about economic weakness that could follow in the wake of this global health emergency.

As can be seen below, it certainly was a month with significant market moves in many markets, and surprising stagnation in traditional safe-haven markets like the Swiss Franc and the Yen.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at precisely the same strong level of 68 that we saw last month, but yet again we are likely not too see that strong a performance in trend following performance, due to the corrections late in the month. But still a positive month though.

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 eased off to 23…down from 24 in the previous month, and if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 29, which leaves the Trend Barometer in a strong overall state. 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 mainly have Energy, Base Metals and a few other Commodity markets, with Heating Oil, SoyBeans and Lean Hogs struggling the most. Carrying the GREEN flag (up trends) at the end of the month, albeit at a more moderate strength, we see Palladium, Gold, Cocoa, Sugar and a couple of Currencies and Stock markets tracked by the Trend Barometer.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, stayed unchanged at 4 out of 10 sectors. This is towards the higher end of the scale we have seen for a long time and unsurprising these are all to the down-side.

Trend following’s relatively uninspiring performance in the 2010s appears to be a function of weaker or fewer trending opportunities in futures markets, rather than a structural drop in diversification between markets, which most likely is a temporary phenonomen due to the role of the Central Banks and their success in preventing a “boom and bust” economic environment. But as we get closer to the US election and all efforts are made to keep this gravy train running…who knows what happens when we have this behind us.

History teaches us, that betting against having a diversified portfolio, comes at a high cost. And there are NO REFUNDS!

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.

End of the Lost Decade of CTAs…well it depends!

A lot of critics have labeled the last 10 years as the “lost” decade for CTAs and trend followers. And sure, with just 19.25% to it's name in the last 10 years, the Soc Gen Trend Index, admittedly did not knock it out of the park during the 2010's.

But this is still better than the -9% return that the S&P TR index saw during the previous decade (2000 to 2010)…oh and with a 51% drawdown along the way.

But just because an index did not do so well, does not mean that some of it's underlying constituents suffered the same fate. And since few investors really want to be “average”, the job really is to find the stocks or managers that stand out.

The trend follower that I know best… produced a net return of app. 145%, with a correlation to the S&P of just 0.03!

70% of its monthly returns, 89% of its rolling 3 year returns and 100% of its rolling 5 year returns were positive during the last 10 years.

By no stretch of the imagination was it a lost decade!

The difficult environment for trend followers in recent years has been well documented by the Trend Barometer, but perhaps we should take it as an optimistic sign that it finished the decade at a very strong level of 68! Time will tell.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month and the decade at a strong level of 68, but we are likely not to see this reflected in the returns of CTAs as the last couple of days of December saw corrections in current trends, pretty much across the board.

The continued transition in the markets from Risk-Off earlier in the year to Risk-On has kept the equity sector trends well supported, whilst putting pressure on Fixed Income markets leading to and overall down-trending state.

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 rose to 24…up from 16 in the previous month, and if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 30, which leaves the Trend Barometer in a strong overall state. 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 mainly saw Fixed Income markets, with the German Bund struggling the most, as well as Natural Gas. Carrying the GREEN flag (up trends) at the end of the month we see BeanOil leading the charge after a healthy 14% jump in December. Precious Metals, some Base Metals, Softs and many of the of the Equity markets tracked by the Trend Barometer.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, increased to 4 out of 10 sectors. This is towards the higher end of the scale we have seen all year.

There is no point in dwelling too long on the past decade as it seem to me that we are facing a very interesting one ahead of us.

Allow me to introduce R. Buckminster Fuller (1895 – 1983).

Despite starting his career by being expelled from Harvard University in 1913, after excessively socializing and missing his midterm exams, in 1983, shortly before his death, he received the Presidential Medal of Freedom, the US's highest civilian honor, with a citation acknowledging that his “contributions as a geometrician, educator, and architect-designer are benchmarks of accomplishment in their fields.”

At this point, you may ask why I bring this up as we enter 2020?

Fuller during his work, estimated that by the year 1900, the information…the knowledge of the human race was increasing at a rate of about twice every 250 years. In other words, every 250 years you would double the knowledge of the human race.

But by 1900, it was double every century… in other words, much faster than expected. By 1945, he said it was doubling every 25 years and by 1982 doubling every 12 to 13 months. And then IBM did an estimate that by 2020 (see where this is going) which is where we are today, human knowledge would be doubling every 12 hours!

So let's think about this from the point of an investor. How are you going to comprehend the world you are trying to invest you hard earned money into, if the knowledge base of all humanity is doubling every 12 hours?

You think you “know” because you studied a particular stock or a set of macro economic data, and you feel confident “knowing what you know” and yet with a doubling of the knowledge base every 12 hours, you can't possibly keep up with that.

And so it raises at least to my mind, the value of “data” besides the only true data point we have, namely the price of a market at a given time.

What are the type of investment analysis tools that you currently rely on, that may not be so relevant anymore? And what happens when investors realize that the old way of doing things does not work as it used to?

“Knowing what you don't know” the old trend following philosophy suddenly gets new meaning, and perhaps much more relevance than it has every had, as we venture in to this new decade.

Not having to rely on “prediction” and “educated guesses” about earnings and future monetary policy (which by the way, the last decade have shown can be very different to what we have ever seen before…think negative yielding Junk Bonds for a start) should be a relief to all investors.

Embracing rules-based strategies that overcome fragile human biases and blending them into traditional portfolios, where ALL the evidence…let me repeat that… ALL the evidence, suggest that you can achieve higher long-term returns with less risk, should no long be up for debate. It is not my opinion. It's what the data and evidence confirms. It's the TRUTH!

I know that I, to a large extent, is preaching to the choir in this post…but frankly a few of you are still watching from the sideline and it is my hope that during 2020, you will make the leap and start building safer and better performing portfolios that can better withstand the market turbulence that we no doubt will be facing during the next decade.

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.

The odd one out… Black Wednesday!

There was Black Friday in 1869, when the gold and stock markets collapsed after being driven to record highs by speculators trying to corner the gold market. And Black Tuesday and Black Thursday of 1929 probably need no introduction…Then there was Black Monday in 1987, when the Dow Jones Industrial Average (DJIA) finished the day down 22.6%, the largest one-day percentage drop in history.

These days we have Black Friday every year…but with a different meaning of course…but from a trend following/CTA perspective, this year coincided with the end of November…which looks like finishing in the Black for all the usual CTA indices.

My own Trend Barometer, finished at a reading of 48, slightly above its daily average since 2015 of 42.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a somewhat neutral level of 48, which is like to lead to mixed return in the +/- 2% range for many managers…but with a slight positive bias.

This was in any event a welcome lift from the depressed levels in October, which saw the lowest daily reading since 2015 of just “9”.

The current transition in the markets from Risk-Off earlier in the year to Risk-On continues with significant trend strength building up yet again in the equity sector.

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 rose to 16…up from 10 in the previous month, and if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 21, which leaves the Trend Barometer in a neutral 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 see markets like the Yen, Swiss Franc, Nat Gas, Lead, SoyBeans, SoyMeal and Lean Hogs. Carrying the GREEN flag (up trends) at the end of the month we see Coffee after it's 20% rise during the month, Live Cattle, Wheat, Palladium and of course all of the Equity markets tracked by the Trend Barometer.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state, stayed level at 1 out of 10 sectors. Another piece of evidence that shows the transition that many markets find themselves in at the moment.

As we head in to the last month of the year and this decade, investors may be reminded about the saying “Diversification Means (almost) Always Having To Say You’re Sorry”. Dr. Daniel Crosby makes some great points in his books about Diversification;

“At its essence, diversification is applied humility in the face of an uncertain future. I think of diversification much the same way that insurers think of providing coverage. Just as some insured folks will have accidents that trigger a payout every year, many more will not. Insurance companies make money because their risk is diversified across the corpus of those paying premiums. Similarly, when you are diversified between and within asset classes, the failure of one single type of investment does not dramatically diminish your odds of long-term success.

Think of diversification as a form of regret minimization. Some investors will regret missing out on huge gains while others will regret participating in huge losses. Which regret will wear worse on your emotions?

Now, before you answer, let me say that the research suggests fairly unequivocally that you will regret participating in losses more than you will regret missing out on huge gains. Daniel Kahneman and Amos Tversky found when examining the utility curve for gains and losses that we hate losing far more than we love winning.

Tennis star Andre Agassi put this into words well when he said, “Now that I’ve won a slam, I know something very few people on earth are permitted to know. A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.”

Perhaps you are the rare breed of human that feels the pain of missed gains more than the pain of realized losses (…I don't really think you are). In that case, get uber-concentrated and prepare for a wild ride. But if you’re like most of us, diversification goes a long way toward decreasing volatility en route to meeting our long-term financial goals.”

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.

Risk-On is back…and dealing with a few myths…

Each year lots of pundits like to remind/scare investors about the historic negative events that sometimes occur during the month of October…especially the 1987 crash. And like all humans, investors fear the risk of loss much greater then then joy of gain…so this narrative always seem to do the trick.

But it strikes me that things have changed this year, as I see more and more commentators and non trend following managers play this card on a regular basis.

“Trend Followers have failed on their mandate to deliver Crisis Alpha…”

is what I'm hearing (followed by a marketing statement about a strategy being offered that is able to make money in periods like February and Q4 2018).

hmmm…

I wonder why they say this…I'm sure I don't need to spell this out to you!

But here is the deal. Trend Followers do not design their strategies with “a mandate to deliver Crisis Alpha” in mind…but rather to deliver strong long-term absolute returns.

This so-called “mandate” is made up by those who want to portray trend following in a negative light. It's a mirage…it doesn't exist.

Oh…and by the way…the term “Crisis Alpha”, did not exists until 2011…decades after the established trend followers designed their strategies.

Of course, some shorter-term managers may design their strategies to deliver performance during short term corrections in stock markets…and if they can…all power to them. But let's not kid ourselves…there is a cost to the long term performance in doing so. But that's fine, as long as investors is made aware of this…and we as trend followers should not point fingers at them for doing so.

What is somewhat ironic about the increased focus on the risk of a major crash or down-turn in stock market prices in recent years, is that it is taken place whilst stocks continue to make new all-time highs. Instead of worrying about what is not happening, we should be focusing and celebrating what is happening in the markets and ensure that we have as much exposure to those trends.

This brings me to another criticism that I'm hearing. Namely that Trend Followers have become too dependent on Fixed Income markets in order to make money.

Again, I would respectfully disagree with this statement. In fact, I would go so far to say, that anyone who did not make a lot of money in Fixed Income in the last decade or two, was not serving their clients well. It is our job as rules based investors to have concentrated exposure to a sector if that is the best sector to be in.

Having “conviction” based on the data presented is what trend following is all about.

Making lots of money in a few markets, in order to pay for the many small losses is how the strategy has always worked…so why would it be any different now?

As Dr. Daniel Crosby notes in his book The Behavioral Investor;

“Good” investment strategies have to be empirically supported, theoretically sound and behaviorally rooted”

three criteria that Trend Following meets.

But just like with another such strategy, namely Value investing, you can read every academic journal article and biography of Warren Buffett that has ever been written, and still find it stomach churningly difficult at times to stay invested in these styles of investing. But the data and evidence don't lie.

The founding fathers of Trend Following, decided to play the odds and ditch the story. Perhaps not the smartest way to build a large asset base, but probably the best way to serve the investors.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a low reading of just 27, suggesting a negative environment for trend following strategies and this is confirmed by the early performance numbers from the main CTA indices. And to make things even more difficult, the Trend Barometer reached it's lowest level of just 9 during the month of October…a level that I have not seen since starting to publish the daily Trend Barometer in 2015.

The current transition in the markets from Risk-Off earlier in the year to Risk-On is causing the challenge as the models have to re-adjust to changes in underlying market momentum.

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 rose to 10…up from 7 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 12, which continues to put the Trend Barometer in 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 only see the German BOBL. Carrying the GREEN flag (up trends) at the end of the month we see stocks well represented along with the Mexican Peso, a couple of Metals, Bean Oil and Live Cattle.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state rose from 0 to 1 out of 10 sectors. Another piece of evidence that shows the transition that many markets find themselves in at the moment.

The general low level of trending sectors we have seen in the last few years, is supported by a detailed analysis published by the good people at Abbey Capital, which analyzes the CTA performance in the past 3 decades.

As you know, whenever trend followers are in a drawdown, which by default happens often (despite it being a profitable strategy), commentators are quick to point out why trend following is “dead” and must (in their opinion) have stopped working.

In recent times there seem to be a few favorite reasons mentioned as to why this must be the case. 1) “Too much money in the space”, 2) “Trendfollowers are being front-run or gamed by other market participants” and 3) “Markets have become faster and Trendfollowers are too slow to react”.

But in an excellent paper by Abbey Capital these arguments are robustly proven to be misplaced and not founded upon facts. In fact, they elegantly show that when you look at the Trend Following industry, the AuM on a volatility adjusted basis has hardly grown in the past decade, unlike the underlying futures markets where growth have been significant… to say the least.

Perhaps the financial commentators are confused with the growth in the assets managed by Hedge Funds. According to Wall Street Journal, there were just 530 hedge funds in 1990, managing a total of $39 billion. Today there are more than 8,200 all trying to find winning bets for what is now a vast trove of $3.2 trillion of investor money. But oddly enough, the growth in Hedge Funds is never cited as a problem.

Abbey Capital concludes that the most compelling explanation is that the market environment has been characterized by fewer major moves and fewer sustained multi-month trends than in previous decades, something I personally whole heatedly agree with and which I have observed in my own Trend Barometer.

Why there have been fewer major trends in markets, is more difficult to address with certainty. Perhaps the success of the Central Banks to (for now) disallowing recessions, but at the same time failing to deliver periods of strong growth is the simple explanation. When we don't have large fluctuations in GDP, maybe trends across all sectors are harder to come by?

But just because you have a decade long period with lower returns for Trend Followers, which by the way could also be by design to meet institutional appetite for low vol return streams, it does not mean that you won't have higher returns in the future. And let's not forget that equity markets have gone through the same fluctuations in returns. The list below provides a sobering look at how poor real returns in US Equities can be over even long periods of time and how regular such occurrences truly are.

Real growth of one dollar
1929 – 1943: $1.08
1944 – 1964: $10.83
1965 – 1981: $0.94
1982 – 1999: $11.90
2000 – 2010: $0.91

With a change of the “Largarde” at the ECB, continued uncertainty in the US-China trade relations, an upcoming Christmas election in the UK…this current decade still has the potential of throwing up some more surprises, so lets see what the last two months have in store for us.

We know from the academic world that we feel the pain of Loss twice as much as the joy of Gain…but perhaps as a surprise to some, Regret is even worse. With Regret, we are looking back, second guessing our decision. The emotions around that decision don’t fade, because it continues to reside in our present state of mind. I hope investors around the world will take action now to avoid regretting later not having any or too little exposure to trend.

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.

“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.

“Category 5” Trends Boosts Performance

While Hurricane Dorian was building up to severe intensity before making landfall in the Bahamas…August also turned out to be a Category 4 or 5 when it comes to the intensity of strong trends and performance for the CTA industry.

Having gathered strength in the first 7th month of 2019, the momentum in many markets was further unleashed during the late summer month, a month that historically has proven to be full of surprises for the markets.

This year, it was not so much new themes that surprised investors but rather the level of intensity of some of the current trends…most notably the rapid drop in global interest rates, that seem to have no end in sight…especially when you listen to policy makers, like the incoming ECB President, Christine Lagarde, who only a few days ago made her views crystal clear in front of the European Parliament by saying that:

“I don’t believe that the ECB has hit the effective lower bound on policy rates.” She went on to say that “All things considered, in the absence of unconventional monetary policy adopted by the ECB – including the introduction of negative rates – European citizens would be, overall, worse off.”

No doubt we live in interesting and unpredictable times, but in my humble opinion, some things never change…like human behavior…which makes an investment strategy which at is core has “I don’t know” as a key design driver, not only a useful player on your team…but an essential part of any portfolio lineup that wants to avoid relegation in the coming years.

As important as it is NOT to miss a strong up Day, Week or Month in your equity portfolio…as critical is it NOT to miss the strong performance periods of trend following strategies. So far 2019, is evident of this fact, as we see many established managers reach new all time highs for their programs.

It is vital to fully embrace and trust the process of how these strategies operate and not continue to see the world like we are, but rather for what it is.  The key to successful investing is to recognize that we are just as susceptible to crippling behavioral biases as the next person…and that the best way to overcome these weaknesses, is to become a rules based investor.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a strong level of 59, which suggest an above average positive 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.

Although we had a dip in trend strength mid month…many of the days during August produced strong readings in the Trend Barometer.

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 surged to 23…up from 12 in the previous month, and if we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 26, which puts the Trend Barometer in pretty strong 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 had quite a few Grain, Soft, Meat and Currency markets. Carrying the GREEN flag (up trends) at the end of the month we see (to no surprise) many Fixed Income markets as well as the Metals.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state doubled from 3 to 6 out of 10 sectors. I think this is the strongest reading of Sectors in a trending state at month-end, that I have ever recorded since starting to post these monthly updates.

Although Interest Rates and long-term Bonds have been trending for a while, it was great to see a few other names on the list this month. Commodities in general, with the exception of Precious Metals had nice down-trends in August.

Trend following is not a new strategy, and let me illustrate this point by finishing this post with excepts from an article from TIME Magazine that appeared in May 1959 about Nicolas Darvas,(1920–1977) who was a dancer, self-taught investor and author. YES that is right…this was written 60 years ago:

Darvas:

“The only sound reason for my buying a stock is that it is rising in price. If that is happening, no other reason is required. If that is not happening, no other reason is worth considering”

“I have no ego in the stock market,” he says. “If I make a mistake I admit it immediately and get out fast.” Darvas thinks his system is the height of conservatism.

Question: Have the markets changed?

Darvas:

“Have the markets changed… In short No. You see the markets are simply human emotion reflected in $$’s. People really need to get this into their heads. It’s not about logic. Company results. Mathematics but emotion. When emotion and logic collide. Emotion will always come out ahead. The way I traded in the 1950’s and made such fantastic money was simply the same method Livermore and Barauech traded before me. I traded the same way right the way through the 1960’s and 1970’s. And I am certain it will be the same going into the year 2000. It’s all about riding huge waves of emotion to the maximum. The big money is made from these moves. It’s crazy. But we are only human…Well you see, to me my method had to make sense. I had to be able to explain it to my partner (who knows absolutely noting about stocks) and she had to grasp the reason why it worked. In short it had to have a lot of common sense about it. My Darvas method was simply looking for the most in demand stocks, in the best sectors in a market Not GOING down. I would ride them as far as the ride would let me and exit when it was over…Makes sense right? But if you ask many traders to explain their method and straight away they mention Elliot Waves, Fib. Retracements, Cycles etc…my question is always… So WHY should a stock go up because of this? I am always left with a blank expression. They simply had no valid reason to trade these stocks. It had no common sense reason to go up. And I found most complicated technical analysis is like this. Great on theory short in common sense.”

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.

No Let Up in Trends…Despite Trump vs. Powell Skirmish

The hot month of July was not as quiet as you would expect, when lots of investors put on their “email auto responder” saying, “…I'll be out of the office with limited access to email…” – clearly they did have access to their trading terminals as market prices continued to move in a trend friendly and divergent fashion.

After a long month of waiting, the Fed finally delivered the much anticipated cut in US rates, the first cut in over 10 years (despite delivering a generally upbeat statement about the economy, saying that job gains have been “solid” and growth was occurring at a moderate rate”). They also took the opportunity to announce the early retirement of the program to shrink its balance sheet, known as QT (quantitative tightening), where the final episode showed that over its 22 month stretch, the Fed’s total balance sheet assets fell by 15.2%, for an 8.6% simple annualized pace…but despite all of this, the Fed also managed to disappoint the stock market. But perhaps not as much as a certain tweet that came out in the early hours of August 2nd in relation to the US-China trade negotiations.

Two new words from the Fed…”mid-cycle adjustment”… clearly sent the so-called experts in different direction in terms of what this really mean.

Could it be the beginning of the end of the longest expansion in US history? We need only to be reminded, that we've had a “secular peak”, at the last year of the decade for many cycles. 29, 69 in equities, 79 in commodities, 89 in Japan, 99 in Tech. 2008…okay, was a year early, so perhaps 2019, will also go down in history as an important point in time.

But whatever “mid-cycle adjustment” really mean, this did not spoil the 2019 (to-date) party for trend followers, who continue to build upon the strong first half performance.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a low level of just 30, which normally would suggest a negative month for most CTAs and Trend Followers in particular. But that is not what early indications are suggesting.

I suspect the reason for this, is that part of the month was spent at higher levels for the Trend Barometer, which peaked around 63 early in the July. This combined with very strong performance in a couple of sectors, meant that managers were able to hold on to the gains, despite general trend strength weakening in the second half of the month.

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 12…down from 15, 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 13, which puts the Trend Barometer in a “negative” 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 only find a few Currencies and Lean Hogs. Carrying the GREEN flag (up trends) at the end of the month we see a few Fixed Income markets, a couple of Metals (Gold & Silver) & as well as Australian Stocks.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending stayed unchanged at 3 out of 10 sectors. Still not super strong, but enough to finish the month on a positive note, especially because the fixed income sectors hold a good number of markets in them.

Like last month, it was short-term Interest Rates and long-term Bonds (up trending) and but this month joined by Precious Metals due to the upward price moves in Gold and Silver.

2019 is so far a good example of how 200 year old golden rules still work, despite many times having been deemed primitive and outdated.

In 1838, James Grant published The Great Metroplis, Volume 2. Within, he spoke of David Ricardo, an English political economist who was active in the London markets in the late 1700s and early 1800s. Ricardo amassed a large fortune trading both bonds and stocks.

According to Grant, Ricardo’s success was attributed to three golden rules:

“As I have mentioned the name of Mr. Ricardo, I may observe that he amassed his immense fortune by a scrupulous attention to what he called his own three golden rules, the observance of which he used to press on his private friends. These were, “Never refuse an option* when you can get it,”—”Cut short your losses,”—”Let your profits run on.” By cutting short one’s losses, Mr. Ricardo meant that when a member had made a purchase of stock, and prices were falling, he ought to resell immediately. And by letting one’s profits run on he meant, that when a member possessed stock, and prices were raising, he ought not to sell until prices had reached their highest, and were beginning again to fall. These are, indeed, golden rules, and may be applied with advantage to innumerable other transactions than those connected with the Stock Exchange.

The rules “cut short your losses” and “let your profits run on” are foundational philosophies of momentum.

Following in Ricardo’s footsteps are some of Wall Street’s greatest legends who implemented momentum and trend-following techniques.

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.

Strong Trend Performance…Even Without a Crisis!

US Stocks had their strongest June since 1955 and recorded their highest ever monthly close, leaving investors in the S&P500 17% better off than at the end of 2018, marking the best first half in more than two decades.

Fears for the economy have stoked government bonds as investors fret slowing growth and rock-bottom inflation. Treasuries returned just over 5% in the first half as they piled in. In the process more of the yield curve inverted, and the world’s pool of negative yielding debt swelled to a new record.

Yet as bonds screamed recession, stocks defied that, too.

This continued fairy tail for equity investors, authored by policy makers, has in recent years not been too kind to the trend following community, much to the delight of the part of the financial media who love to call for the extinction of this strategy.  I distinctly remember one such headline from Bloomberg on February 28…

One of Wall Street’s Most Popular Trading Strategies Is Now Failing

and the article went on to say…“Turns out the algorithms behind so-called trend-following quants are rather primitive and suffer from many of the same weaknesses a mortal brain might. They've struggled to react fast enough to the unforeseen side effects of ending a decade of central bank stimulus, and even seem to get baffled by U.S. President Donald Trump.”

Well, luckily for those of us who have had a long love-affair with trend following, we know not to pay attention to the financial media.

…and so the story goes that despite Donald Trump's continued tweets, a trade war of proportions we have not seen in decades, injection of liquidity that frankly was unimaginable not long ago, trend followers had a pretty good first half of 2019 too. Who would have thought that this little loved strategy, that is often referred to as a “Crisis Alpha” tool, could deliver such strong results without a Crisis. Of course you knew this…as did I.

Market moves this month:

Trend Barometer statistic this month

The Trend Barometer finished the month at a neutral level of 43, which normally would suggest a quiet/flat month for most CTAs and Trend Followers in particular. But that is not what early indications are suggesting.

The reason for this, is that a lot of the month was in fact spent at higher levels for the Trend Barometer, which peaked around 68 mid-month. So the foundation for a solid month and a solid first half was in place, even if the last few days of June have been a bit more challenging.

BUT not all trend followers did equally well in the first six months of 2019 and the return dispersion between seemingly similar trend followers is quite high. As individual manager returns for June are not published by the time of this post, looking at the end of May returns, I noticed a huge range in the trend following returns for the first five months, between -19% to +15% – which goes to show that not all trend followers are the same.

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 was 15…down from 21 , but once we include those ending right at the neutral reading (indicated by the “grey” shade right at the 30% level) we get up to 19, which puts the Trend Barometer in a “neutral” 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 only find two markets namely Lean Hogs and Coffee. Carrying the GREEN flag (up trends) at the end of the month we see lots of Fixed Income markets, a couple of Stock Indices & Currencies (against the US Dollar) as well as Gold and Palladium.

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending eased back from 4 to 3 out of 10 sectors. Still not super strong, but enough to finish the month on a positive note, especially because the fixed income sectors hold a good number of markets in them.

Like last month, it was short-term Interest Rates and long-term Bonds (up trending) and Meats (down trending) that were the sectors showing consistent trends at the end of the month.

From the lows of the current drawdown for most established trend following managers at the end of November 2018, we have had 5 out of 7 positive months in the BTOP50 index, which has been a nice change. As much as I expect the recovery to continue and the industry to make new all-time highs again, we should not be surprised (or disappointed) when we see a bit more choppiness return to the performance of trend followers. As much as we must manage our negative emotions during drawdowns, we must also manage our joy when smooth returns have persisted for some time, as it has never been how this strategy behaves in the long run. BUT, this is not a forecast of difficult times ahead…just a quick reality check and a reminder that Buffet was right when he said “Be fearful when others are greedy and greedy when others are fearful”, and we need to continue to learn to love the drawdowns of trend following as much as the run-ups in performance, as true wealth in this strategy is built (like in most investment strategies) by being a long term investor.

Let me finish with a quote I received from George, a loyal listener and a great help to the podcast;

“Most investors miss the point of having a strategy with rules. It's not to find a magical method that works all the time. It's about operating within a certain framework so you know what to expect good and bad and how to respond. It's about establishing a circle of competence.” – Mark Minervini

And if you want to check in on the 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.