Friday, March 4, 2016

Managed futures sector review - sectors trend CTA's make money



Often times you will hear managed futures managers discuss the markets they made money in, but the really relevant issue is whether they were able to exploit trends in a sector. Trend-followers need to capture sector trends, or more bluntly, there have to be sector trends that managers can exploit. Hence, we have developed a simple table of sectors, their recent direction, and the macro signal that is coming from these prices. 

We look at a trend indicator for each major market within a sector and average the simple direction signals to form a sector  up or down indicator to show sector trend. For example, we look at a set of stock indices around the world which show all are now in major up trends. For bonds, we look at all major global bond markets as well as the different futures markets along the yield curve. Here the story is mixed with US markets rolling over from their up trend but the EU continuing to trend higher. 

We also discuss what the prices are indicating as a macro signal. In particular, we are focused on whether the trends are consistent with macro fundamentals or the story that is currently being told in the marketplace. For example, oil prices have been trending higher, but the stories and data on full storage and limited production declines still dominate the news. There is a divergence between prices and fundamentals. We cannot say which is right, but we can say that this is an area of potential risk.

Just because a sector seems to be trending does not mean that all managed futures managers will make money, but we believe it provides a good indicator of whether the environment is trend rich. If there are significant trend reversals or if the sector shows mixed behavior, we would expect flat or negative performance. Right now, the indicators are showing a good environment. 

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