The week ending November 11, 2022, was a bad one for trend-following due to violent reversals in equities, fixed-income, and forex markets.
The violent reversals occurred after the October CPI release and the expectation of “peaking inflation”. The S&P 500 and the NASDAQ-100 surged 5.9% and 8.8%, respectively. The S&P 500 High Beta Index rocketed 11.3% higher as investors rushed to buy riskier stocks. At the same time, the US Dollar index plunged by 4.1%, and the 10-Year Note yield plummeted by 35 basis points.
The violent market reversals impacted strategies that follow trends and naturally have a lag in responding to fast market moves. The iMGP DBi Managed Futures Strategy ETF (DBMF) fell 6.3% for the week, and this is the most since a 6.5% loss for the week ending February 28, 2020.
The KFA Mount Lucas Index Strategy ETF (KMLM) fell 7.8%, which is the largest drop since its inception in December 2020.
Our trend-following strategy with 23 futures contracts, the PSI5TF, was down 7% for the week (backtest).
As it may be seen from the statistics of the chart at the bottom, a 7% weekly drop or larger has occurred 2.2% of the time, or in 71 rolling 5-day periods since 2000. In the weekly timeframe (not shown), a 7% drop or larger has occurred 17 times since 2000, or about 1.4% of the time.
Going forward a good fraction of unrealized trend-follower gains for this year may evaporate due to violent moves, as uncertainty about interest rate policy rises. Over the long term, CTAs and trend-followers have performed well but there can be extended periods of sluggish performance. As long as trends form in the markets, trend-followers will profit, but volatility is a challenge, as was the case last week.
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
