July was a currency trend month - Likely to continue

For trend-followers in July, currencies were the big winners. Strong trends with relatively low volatility made for many winning trades. These trends as well as moves in precious metals are likely to continue in August. Currently, this is the place for greatest upside opportunities. The currency moves did see some short-term reversals around central bank and key economic announcements which may have hurt traders with tight stops, but the general direction in 2017 continues.

The major trends in other asset class sector are less defined as we begin August. Stock indices have continued to march higher even though the end of month signals in June looked for a trend decline. Valuations are extended, but this may not be relevant for shorter-term trend trading.  Markets trends slopes are shallower so trend views are mixed. Energy trends look very attractive but economic story does not seem consistent with price action. Bonds have moved higher in the second half of the months with developing trends, but have not broken out from highs in June. Further upside trends will have to be coupled with central bank delays in tightening. Grains have been choppy during this critical growing period. Some drought demand cannot be reversed with new rains, but there also is a tendency for overreaction from news. Crops surveys will start driving the market.

The folklore is that August can be a sleepy month given some many traders are on vacation, but data have proved that there are no holidays for the development or exhaustion of market trends. Nevertheless, trend opportunities seem to be more concentrated in currencies. 

Sector dispersion continued for July - Value from picking winners

The equity markets again continued to march higher with strong gains in international and emerging markets. However, it should be noted that non-dollar equities were given a nice tailwind from the decline in the dollar, (take off 2-3+ percent). After the currency adjustments, there is less reason for large celebrations.  What should be a concern is that the biggest moves were in large cap stocks with more modest returns for small cap and value indices. This should be expected on a dollar decline given the international nature of large-cap earnings, but lower breath is not a positive sign for follow-through with the trend. 

The sector dispersion was significant with finance leading the way after the clean bill of health from stress tests. Banks have been able to announce plans for shareholder buybacks and dividend increases. Energy generated positive gains on higher oil prices but still is a sector laggard. For all of the concern with technology, it still generated a positive month albeit this is for larger-sized names. The largest decline came in consumer stables which is surprising if there is expected higher economic growth. Utilities declined with bond markets. 

The gains for some countries were truly surprising given geopolitical and policy uncertainty. Mexico continues to move higher on no trade action from the Trump administration. South Korea and Taiwan are both higher and having great YTD performance in spite of all the North Korea turmoil. Again, the dollar decline was a help, but country-specific bets rewarded investors who made strong regional allocations.

Long duration bond investors were hurt from concerns about Fed balance sheet selling. International investors were rewarded for their currency exposure. Credit markets continued to see inflows which drove spreads tighter. 

As many investors head for their holidays, the trends for long-only investor look strong. While bond trend performance is more mixed, equity style, sector, and country trends all point to holding onto existing positions. Many may be ready to unfold the beach chair; nevertheless, risks from central banks announcements will increase as we move into September. Enjoy your holiday, low volatility may be ending upon your return.

CTA's find trends to reverse some of last month's poor performance

The month began with some very promising trending opportunities, but with some choppy moves in both bonds and commodities, returns were generated by those who were nimble at position-sizing and getting out of losing trends before profits were completely given back to the market. This was a month where trend timing length mattered. Long-term trends ride through short-term choppiness. Short-term trend following is often able to profit and exit on reversals. A difficult problem is matching model to trend length and is often the reason for a diversity of timing models.

The truly bright spots were in currencies where the dollar decline again returned in earnest. These were not, however, one way moves, currency jump coupled with reversals may have hurt shorter term traders. Economic announcement especially from central bank are a key driver of short-term noise.

Again, there seems to be strong dispersion in manager performance that is masked by the positive gains in the SocGen CTA index. The BTOP50 index was also positive although slightly lower at .51 bps. The SocGen short-term index was down slightly for the month and has had a more difficult time in 2017 versus the longer-term trend-followers. 

Rhetoric versus reality for July - Watch the cash flow and growth

The drumbeat of over-valuation continued in July, but investors do not seem to be listening to any negative stories as stocks around the world continued to move higher. The view that economic growth will pick-up in the second half of the year coupled with rosier earning forecasts have pushed equities higher. Any worry about valuation will be for tomorrow. Today, the focus is on buying risky assets around the world.

Of course, if you were looking for reasons to be negative you could find them just below the surface. First, a good portion of the strong international gains was associated with the dollar decline. The DXY index fell just under 3.5% for the month. Second, small cap and value indices did not do as well as large cap names. There is a concern over the breath of the current rally. 

Bonds have been more mixed with US long duration showing the only negative returns. This should be expected given the disclosures on the balance sheet unwind. Nevertheless, inflation cannot move beyond 2% so bonds are not considered as risky as few months ago.

International bonds were positive only because of the dollar move, but credit spread tightening continued to on further flow into corporates. The mixed signals from central banks made for a more difficult fixed income environment for active traders. Bond investors are realizing that the great liquidity gains of from QE are over or reaching twilight. The Fed has made clear its intentions for reducing its balance sheet. The ECB is only sitting on the fence given the retreating inflation numbers in the Eurozone. Liquidity concerns should increase but it seems as though this will have to wait until after summer holidays.