Look out Below; Watch out Above?

We had a post all written up for today about the increasingly down mood in many markets lately, but wouldn’t you know it – just as soon as we finished our draft on Friday, the market started to rally… and then we come in this morning and see this:

Disclaimer: past performance is not necessarily indicative of future results. Chart courtesy Finviz.com.

So are we looking out below, or watching out above?

We’ve written in the past about October being an ugly month, but this year, October’s nasty reputation looks like it has continued on into November. From the beginning of June to the end of September, most of the “risk on” assets were on a decided up trend (and many managers were getting long in those markets). But then, those markets reversed course from September to last week, with price points barreling away from the year’s highs:

You can see this dichotomy in price action in the table below, sorted by worst performance from each market’s September highs through last Thursday.  The left side (June to September) is decidedly green, and right side decidedly red. It’s crazy to think that none of these 22 markets zigged while the others zagged during these 5 and a half months. All went up in varying degrees, and then all went down in varying degrees.

Disclaimer: past performance is not necessarily indicative of future results.

So where is managed futures in all of this?  They can make money on both the upside and the downside, right?  Why didn’t managed futures just ride the uptrend through the middle of September, and then reverse course and ride the short side down?

Good idea, but that’s not how traditional managed futures works. You see, that move up from July surely was real, and many managers were on the long side of that move. But most managed futures programs do not try and pick the top of that move and reverse position at the top. For one, it is darn hard to pick such a top. How do you know the market won’t keep going up?

For most managed futures programs, they want to give a trend plenty of room to mature and extend. The old cut losses short and let winners run type of logic. And so they use some trailing indicator to signal when a trend has ended – something like the 100-day moving average of prices. That means the movement of prices down from a high point isn’t really an opportunity (yet) for managed futures to make money on the new down trend, but rather that movement down from the highs represents a reversion to the mean and pullback in prices back to whatever trigger the model uses to signal the end of a trend.

So in the case of this downward move from September through last week , because the move down was mostly a reversal of the previous move up – rather than a breakout lower from sideways price action – it proved unkind to managed futures performance.

We wrote earlier this month that trend-following wasn’t dead; just in the middle of a rough patch due to the lack of persistent trends (see this reversal as a prime example). Trend followers need that breakout move to show some staying power (2 months would be ideal, 4-6 months would be better).  Trend following isn’t dead, but to paraphrase one of our kids’ favorite movies: you’d be surprised by what you can live through.

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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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