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Managed Futures Insider Report

Market Force of Trend:  In the last published report (below) we said: “For trend followers been watching the price persistence in KC wheat, note that trend depth level gauges are starting to weaken.” 

In this report we note that gold trend level may be weakening.

Top Trending Markets:

< .10 Trend Indicator

Natural Gas (approaching .15, this trend is expanding in force)

< -.10 Trend Indicator

LME Lead

LME Copper

LME Zinc

(Note that Wheat fell off this list.  Last issue we wrote: “Of these markets, keep particular eye on the KC Wheat.  The force of trend indicates increased short pressure potential but the commitment of these shorts appears to be weakening.)

< -.15 Trend Indicator

Copper

Gold (Note that gold trend is weakening, pivot foundation may be established.)

 

Relative Value Thoughts:

Three markets have significantly diverged from their historical mean,  according to one fund model that tracks such items.  Lumber and coffee have reached the outer end of their elastic price ranges, with the US dollar.  On the other hand, markets on their elastic mean, exhibiting a lack of divergence, include corn, soybean meal and the Canadian dollar.  Watch for relative value traders to pair appropriate positions.

 

Market Environment Risk Management

Recently an RIA challenged me relative to managed futures, saying he doesn’t anticipate trends occurring with the same force that have in the past.

This is an interesting comment to consider.

First, no one knows how future market environments play out.   But it can be said that trends have had a tendency to always be a present market environment.  In fact, there is a mean reversion aspect to trend following.  On both the upside and downside, the investment can divert from its performance mean – and this has always mostly reverted to historical patterns in the past.  After historic performance of 2008, for instance, one might have considered exiting the investment upon its statistical highs.  I wrote about the concept of entering a CTA investment on a drawdown and exiting a CTA at a statistical high water mark in chapter ten of High Performance Managed Futures.  For point of this discussion, understanding that managed futures has a mean reversion aspect is one reason to consider that the lack of trending markets may be at an elastic point in its trading range.  Thus, the worst point to say “trends are dead” might be when a directionless market environment has been a present market environment for an extended period of time, as is the case now.

Second, the point of a well diversified managed futures portfolio is exposure to a variety of market environments, not just price persistence.  In the coming issues I will be demonstrating this concept by putting together a market environment diversified portfolio.

The third point is perhaps most critical.  Particular RIA was considering diversification to protect the portfolio during crisis.  From a modeling standpoint  it is important to consider investment performance during times of crisis.  This individual made the accurate point that managed futures performance has been off the past two years (the BarclayHedge CTA index was down -3.09% and -1.70 in 2011 and 2012 respectively).  In part this is due to market environmental factors, but the point with managed futures is to manage risk.  When the market environment is not appropriate for a particular strategy the managed futures investor should have the goal of not generating significant loss.  When considered from a risk management standpoint, one primary expectation investors might anticipate is that when volatility enters a market and leads to sustained price persistence, this is the time to expect performance in a managed futures program – when it is needed most.

 

Interest Rate Force of Trend

The hardest trending interest rate markets right now are the Canadian 10 Year Government Bond (at a 10.56 trend level) followed by the German Bund (at 8.79).  Diverging is the Japenese 10 Yr Government bond (at -1.51).

 

Odd Market Environments?

If you find the current market environments odd, you’re not alone.  But I bet we have different reasons.

With equity markets up north of 10 % year to date and the Newedge CTA index up 4.43%, my suspicion is one is a faux market environment.  In equity markets, patterns of price persistence are divergent based on price direction.  Trends higher often move in stair step fashion, often triggering risk control mechanisms when the trend encounters temporary directionless movements.  Conversely, volatility driven price trends lower that feature persistence over time tend to move without as much directionless noise.  It’s just a casual observation that stimulus driven market movements tend not to have the same degree of

 

 

 

DISCLOSURE: These are the opinions of the author and may not have considered all risk factors. Nothing on this web site should be construed as an individual recommendation, talk to your independent advisor. The author and Opalesque may have relationships with those people they cover in the publication. Mr. Melin provides a full disclosure of his business relationships to regulators and certain eligible participants who engage him in consulting projects. Managed futures investing involves risk and there are no guarantees of safety or future performance being implied. Managed futures can be a risky investment. This web site and its content is subject to the terms of the web site. Risk Disclosure and terms of web site are available here: http://www.uncorrelatedinvestments.com/templates/Disclaimer.html Performance information received on this site is provided by third parties and deemed reliable but there is no guarantee relative to same. Performance reporting sources and quality assurance techniques may include, but are not limited to: disclosure document, CTA self reporting, brokerage firm reporting, consultant reporting, spot checking other reporting databases; nonetheless no guarantee of accuracy or implication performance verification or auditing is being made by the publishers. The CTA Database is a project separately managed from www.uncorrelatedinvestments.com.

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