CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

“A Century of Evidence on Trend-Following Investing”

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In recent years, there has been a proliferation of academic research that evidences the positive benefits of trend following.  I’m a trend follower and have been since I founded my business in 1992.  Maybe I was just optimistic when I started, but many years and a track record I’m proud of tells me it works.  The reason is tied to our human behavioral tendencies.  I’m not sure why but we humans seem to wash, rinse and repeat and in that is your and my opportunity.

AQR’s Brian Hurst, Yao Hua Ooi and Lasse Heje Pedersen authored a white paper in 2014, “A Century of Evidence on Trend-Following Investing.”

They concluded:

Trend-following investing has performed well in each decade over more than a century as far back as we can get reliable return data for several markets. Our analysis provides significant out-of-sample evidence across markets and asset classes beyond the substantial evidence already in literature.  Further, we find that a trend-following strategy has performed relatively similarly across a variety of economic environments, and provided significant diversification benefits to a traditional allocation.  This consistent long-term evidence suggests that trends are pervasive features of global markets.

Trend following is integral to our investment approach at CMG.  Click below to read more about trend following and the research that demonstrates the validity of the approach.

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“Don’t Fight the Tape or the Fed”

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The number one rule many of us were taught is “Don’t Fight the Fed.”  I like to add “trend” into that equation and, as you’ll see in the next chart, the math is compelling.

When the Fed raises rates (don’t fight them) and the trend turns negative, equities underperform.  Focus on the red arrows.  Two different time periods are measured, however, the message is the same.  The big corrections come when both the Fed and trend turn negative.  I wrote some time ago in On My Radar to “watch out for minus 2.”  We currently sit at -1.  I’ll share this chart from time to time – especially if -2 is triggered.

Here is how you read the chart:

  • The top section plots the S&P 500 Index but focus on the middle section.
  • NDR has a Multi-Cap Tape Composite Model to measure the technical health of the broad equity market. That model aggregates the signals of over 100 component indicators and generates a signal based on the percentage of the component indicators that are giving a bullish signal for the S&P 500.  It measures momentum and trend.
  • The Fed component is really an interest rate component, which measures the trend in rates by looking at the yield on the 10-year Treasury note. When the 10-week trend in yields are lower than their 70-week trend in yields, the S&P 500 has produced larger gains.  When it is higher, the S&P 500 has performed poorly.  It’s that simple.
  • The combined indicator can produce a score of -2 (both indicators are bearish) to +2 (both bullish) and overall have done a good job historically as a risk-on/risk-off indicator.
  • The current reading is -1 (data shows we need to watch out for -2): refer to the red arrows.

0217-11

Source: Ned Davis Research

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Paul Tudor Jones’ 200-Day Moving Average Rule

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Paul Tudor Jones is one of the greatest traders of all time.  Jones’ firm, Tudor Investment Corporation, manages about $13 billion across multiple strategies.

Jones says, “The whole trick in investing is: ‘How do I keep from losing everything?’”  To which, he said he would advise investors to “to get out of anything that falls below the 200-day moving average.”  Visually, it looks something like this:

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Source: dshort.com.

Here’s a trend following idea for you to consider.  In the next chart, the black line is the simple 200-day moving average line.  The red dotted line is the 50-day shorter-term moving average line.  Both are a way of showing us the current price trend.  When the 50-day trend line moves above the longer 200-day trend line, the overall trend is bullish.  When below, it is bearish.

Since 1929, 65.98% of the time, the market trend was bullish and returns highest.  Likewise, the data since 2006 shows similar results.  The return figures are the percentage annualized gain per year.  The yellow highlight shows the regime we are in today.  The trend by this measure is currently bullish.

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Blumenthal’s Best Bets on TheStreet

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CMG Capital Management Group CEO Steve Blumenthal appeared on TheStreet this week.  Steve discussed his best ideas for investors to consider when the next buying opportunity presents, which he sees in the next 12-18 months.

In his weekly commentary, On My Radar, Steve has addressed in depth excessive market valuations and low probable forward returns, the global debt crisis, deleveraging, low GDP and negative corporate earnings.  Nonetheless, Steve says that recessions and market corrections create terrific buying opportunities.

Please enjoy the video below.  Click here for the transcript of the interview.

Blumenthal Appears on FOX Business

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sb-on-foxSteve Blumenthal, CMG Capital Management Group CEO, was a guest on FOX Business’ “Countdown to the Closing Bell with Liz Claman.”

Steve discusses the possibility of a significant correction in equity markets due to low GDP growth, negative corporate earnings, excessive valuations and huge global debt.  Indications are that returns on equities will be flat to minimal for the next 10 years, says Steve, due to the high valuations of stocks.

In Steve’s opinion, investors should employ trend following strategies, diversify holdings and compile a buy list of specific equities to consider when the market corrects, creating buying opportunities.

Enjoy the segment below.

The Trend is Your Friend

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arrow-up-4Almost every effective strategy I know can be written on the back of a napkin.  The processes may appear to be simple, but implementation can to be complex and challenging.

My experience is that the best strategies can be explained simply.  The “trend is your friend,” as they say.  The hard part is having the emotional fortitude and discipline to stick to your process.

Why today?  71% of the world’s government bonds are yielding less than 1%.  Equity market valuations are too high.  Trend following strategies can help you participate in market advance and protect against major market declines.

Click below for an informative overview on trend following and research showing that the process can be effective over different periods of time.

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Trend Following Works!

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2016-08-07We will look back and identify this market as one of the most reckless financial bubbles of all time.  We will look back and identify the next correction as one of the greatest buying opportunities of all time.

Investors are expecting their advisors to deliver 10% returns.  There will be disappointment.  A lot of money is going to be in motion.  I favor a broad-based, holistic asset diversification.  Include strategies that may gain in both bull and bear markets.  Own some gold.  Risk protect that equity exposure and stay tactical with your high yield bond exposure.  Robo-like 60/40 is in trouble.

Trend Following Works!  Learn more about trend following here.  Ahead, I see it as a great opportunity for you and your business. See more advisor investing education pieces in the Advisor Resource Center. By Steve Blumenthal 

The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change.  They do not represent the opinions of CMG.  CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts.  Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.

High Yield Bond Opportunity On The Horizon

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steve_foxThe chart below tracks the delinquency rate on commercial and industrial loans from all commercial banks on a percent change from the prior year (blue line).  It then compares that change to Bank of America/Merrill Lynch US High Yield spread (red line).  The spread is simply the current yield minus the comparable yield for a safe investment, like U.S. Treasurys, that has a similar maturity.  If the average maturity is five years on the ML HY Index, then the spread is that yield less the five-year Treasury yield.

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