Trends signals still mixed in many asset classes - Long US equity indices still strongest signal

Trend behavior last month was mixed for many CTA managers. The allocation weights had a significant impact on November performance. We believe there may again be significant dispersion in performance because trend dispersion is high. For example, US stock indices show strong up trend signals while non-US stock indices are showing clear short signals. The opposite is the case for bonds where US bond signals are for short positions while non-US bonds signals point to long positions.

The dollar reversed long signals and is now showing sell signals on lower prices in spite of higher interest rates versus other developed countries, tighter monetary policy and higher economic growth signals. The oil complex continues to produce long signals. Base metals have generally been choppy but now have a short bias. Commodities do not have clear signals expect for down trends in corn and wheat. 

Sector return performance for equities strong across the board - Hold overweight in equities

Equity style sectors were strong across the board with only emerging markets posting a negative November return; however, emerging markets have been the best performing sector year to date. The value index showed a strong gain although it still lags the growth index year-to-date. Trend indicators are all positive except for emerging markets and the short-term trend in the small cap index. Price indicators suggest that there is no reason to cut equity exposures.

US market sectors all showed positive gains with trend and break-out indicators positive across all time dimensions. Consumer discretionary and consumer stables posted the best gains. The energy sector improved on higher oil prices. Real estate has been the sector laggard for the year.

Country equity indices were more muted and diverse in their return performance for November. Some EU country indices turned negative as well as Brazil and Taiwan. Country indices have been more affected by commodity performance and specific trade flows this month. Nevertheless, year to date performance has been very strong; in many cases better than the US benchmark index. 

Bond ETFs generally showed negative returns for the month with the only exception the long duration US bond index (TLT) and international bonds (BWX). Trends have generally been headed lower with the exception of international bonds which have had a currency translation tailwind.

Asset allocation based on trend and break-out signals still point to holding risky equity assets across a diverse set of sectors and countries. Indicators show a slowing of momentum for those sectors and countries that have strongly outperformed long-term averages. Bond indicators suggest holding lower exposures versus strategic benchmarks except for exposure to international bonds. A mixed signal is coming from long duration bonds which had positive performance for the month. This conflicting signal should be watched closely in December.

Managed futures slightly positive in a choppy environment - Performance driven by asset class weights

Managed futures managers were, on average, positive for the month with returns beating commodities and the fixed income Barclay Aggregate index. Managed futures did not beat the strong equity performance but that should not be a surprise given that equity exposure will only be a small portion of the total risk exposure for managers. Most managers will cap the equity exposure within the program, so even if equities are trending higher, performance will lag a long-only index. 

The controlled equity exposure is one of the reasons for the low correlation between this alternative strategy and stock returns. Nevertheless, CTA's were able to exploit the strong trend in oil as well as large moves in short-term interest rates. Fixed income opportunities were more difficult to exploit given the strong choppiness around short and intermediate moving averages.

The SocGen trend index was up 46 bps for the month and the SocGen mutual fund index showed gains of 37 bps. Their short-term index was down just over 100 bps. The BTOP50 index was down 36 bps for the month. The average mutual fund in the managed futures category for Morningstar was down 49 bps with most of the managers plus or minus 2 percent for the month. 

Going into the last month of the year, managed futures index has positive year-to-date returns with better performance than commodities and bonds.  However, returns trail equities which have had by any measure an unusually strong year. Allocations to this alternative strategy have done what has been expected from a diversifier to traditional asset classes.

Stocks continue their strong performance - Hard to fight equity trends; the opportunity cost of not following trends is high

A combination of good economic growth news and a fiscal policy tailwind again drove US equity markets. The discounting of a US fiscal accelerant shows up in the positive US-global return differential for the November. 

Small cap, value, and growth all showed strong performance, yet there were some surprises along the return spectrum. For example, long bond performance was positive in this high growth environment. Credit, on the other hand, generated negative performance. The search of yield continues but rumblings about tight credit spreads have caused some to avoid adding to positions.

In spite of the strong US growth story, the dollar declined provided added return opportunity for developed market fixed income. The underperformers for the month included emerging markets stock and bonds. Commodities continued to show lackluster performance even with the positive economic growth story.

The take-away from November is that continued holding of risky assets is a profitable choice. There is no question that excessive credit has driven the gains in equity assets and that any reversal will be magnified by leverage de-risking, but this warning story can last a long time without being realized. The opportunity cost of not following trends is high.