Financial Botany: Are We Missing the Forest for the Trees?

It’s really easy to look at a blood red screen with a few safety plays blazing green and think, “Oh, ok- we’re risk off today.” Sometimes, that’s a fair assessment, especially when it looks like the markets getting hit hardest are the ones surrounded by flashy headlines – such as a lack of investor confidence in the Eurocrisis solutions tanking the Euro lately, or Treasuries going neon (green) after Operation Twist hit the scene. This year in particular, risk on and risk off trading atmospheres have been fleeting and fickle, reversing course on a whisper of a rumor and wreaking havoc on a good amount of managed futures trend following programs.

So when we see a red blood screen, and we hear the crazy headlines, it’s understandable that we write it off as “another one of those days,” and, indeed, comments in the Twittersphere from market participants seem to have that sort of ring.

But are we missing the forest for the trees?

Taking a look at MTD movement in some of the more liquid markets in each sector, it looks like a sustained movement to the downside. The stars indicate markets that have, as a brief glance at Finviz shows, hit new 2011 lows in December; several more look to be flirting with prior lows for the year, as well. To be fair, Finviz YTD performance does not smooth prices to take into account the effect of rolling the futures contract over upon expiration, and may be different from the cash market or backadjusted YTD performance for that reason, but the gist remains the same.

Disclaimer: Past performance of markets is not necessarily indicative of future movement.

There are some glaring exceptions, and those exceptions happen to be traditional flight to safety investments. They may not be making new 2011 highs, but their trajectory is definitely distinctly different.

Disclaimer: Past performance of markets is not necessarily indicative of future movement.

We’re accustomed to thinking of “risk on, risk off” on a daily basis, but the data shows that it has been occurring for longer periods of time. The question now becomes, how enduring will this perspective be? We’ve grown so accustomed to it being nearly a daily change that an extended period of either predominantly risk on or risk off trading seems foreign. As we’ve touched on recently, many of the recent risk on surges appear to be fueled by little more than hope and a prayer. Is the bigger picture that the markets are finally coming to their senses? Are they realizing exactly how much trouble we’re all in with the global economy walking a tightrope and attempting to dodge bullets like the Eurocrisis, a treacherous regulatory landscape, employment woes and more? That’s not even taking into account the struggles that face us moving forward.

Those holding out for the famed “Santa Claus” rally in stocks (and, by extension, the rest of the “risk on” crew) are certainly hoping that’s not the case, but as investors survey the volatile political, economic, and social climates across the globe during their end of year portfolio evaluations,  their seasonal belief may be overshadowed by some cruel realities. There’s no way to know whether this will be enduring, but those managed futures programs holding short positions and benefitting from this most recent period of risk off behavior are sure hoping the year ends with a wimper instead of a bang.

Bouchard Capital- Short Term Multi-MarketCovenant Capital Management AggressiveClarke Capital WorldwideIntegrated Capital Management Global ConcentratedRobinson Langley Capital Management, and Dominion Capital Management Sapphire have all benefited from the risk off movement this month, particularly in Cotton. Other programs have struggled for a variety of reasons. Though Dominion is now benefitting from some short positions, the lack of follow-through on short term trends has hurt them overall in December. While the view of the forest may paint the picture of a trend, their strategy, in the thick of it, has them running into trees shaped as brief bursts of volatility. Much to our surprise, the only options selling program we’re following that’s taken a hit in this environment has been Reynoso Asset Management LLC Small Accounts– and they’re only down 2.3%.  Typically, we’d expect the all of the option sellers to be hurting badly in this atmosphere.

That being said, we will note that the bulk of the programs we’re following are posting gains month to date. Past performance (especially this year) is definitely not indicative of future results, but this is certainly a nice change of pace after the past few months. Will this trend be enough to push managed futures into positive territory for the year? Well, that might be even more of a stretch than believing in the Santa Claus rally. With BarclayHedge putting managed futures down -3.04% through November and Newedge putting us down -4.64% YTD, it would take more than a mere “bang” to push us through; we’d have to pull off a full fireworks display. In the meantime, everyone is  holding their breath to see whether the end of December will bring the kind of surprise trend reversal seen in early October and the end of November, and can you blame them? If this year has proven anything, it’s that nothing is a certainty, and to expect the unexpected.


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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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