Trading by the Tides

We’ve been following the risk on/risk off trading conditions for a while now, and this year has not brought a return to the more “normal” market environment that we’d hoped for. For the uninitiated, “risk on/risk off” is a way of saying that large groups of markets have a tendency to rise or fall in unison. And while a rising tide may lift all ships, that also means that a falling tide lets them all down at once.

Well, yesterday we saw even more evidence that this isn’t just a figment of our imagination – Alcoa executives echoed our frustrations during their conference call. Via the Washington Post (emphasis ours):

In the past year or so, Alcoa executives said in a conference call and to investors, the price of aluminum on the London Metal Exchange has cut the usual ties to the metal’s fundamental demand and supply. Instead, the share price is now responding to the latest headlines on government economic measures, especially to actions taken by central banks, that affect the world economy overall.

To demonstrate its point, Alcoa used a slide show that linked big moves in the price of aluminum to a Chinese stimulus plan announced Sept. 7, a German court ruling in favor of Europe’s bailout efforts on Sept. 12 and the U.S. Federal Reserve’s announcement of its “QE3” program of bond buying on Sept. 13.

“The market today is basically driven by headlines and not market fundamentals,” Alcoa chief executive Klaus Kleinfeld said in the conference call.

This headline-driven market has been particularly tough on managed futures, which are largely made up of systematic trend following CTAs. Trend followers need trends to last for a while – long enough for the trend to emerge, for the CTA to initiate a position, and then to ride the trend for a profit. When trends are too short or nonexistent, CTAs will be hopping on too many false breakouts, meaning quick reversals for a loss after their positions are initiated.

Unfortunately, that’s what we’ve seen all year with managed futures. The Newedge CTA index was up in May, down in June, up in July, down in August… (Dislaimer: past performance is not necessarily indicative of future results). Trends would get started and produce one good month of returns, only to see a snapback that erased those gains in the following month – due in large part to those global economic concerns Kleinfeld was referring to.

Unlike the actual tides, headline-driven markets are anything but predictable. When diversification opportunities are scant and the tide can – and does – reverse at any moment, it takes a great deal of skill (and even a little luck) to avoid getting beach – or dragged out to sea and smashed on the rocks.

One comment

  1. How long have you been around? It was always like that. Even worse at times. Old models don’t work. Futures is a zero sum game. Did you miss a the three year trend in AAPL? Have you overlooked the two year trend in HD? You are at the wrong side of the market.

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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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