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.