While the buy-and-hold crowd join the robots in pumping prices up- and then down, and then up and so on – are rejoicing today after stock market gains of 3% and more – managed futures managers may be saying “Not again…”
While not as fully short as they were at the beginning of October, most systematic multi market managed futures programs are still on the short side of the “risk on” assets (stocks, grains, metals, foreign currencies) and long side of the “risk off” assets (USD and bonds), meaning they are essentially betting on a continued ‘risk off’ environment. This has pushed many programs to small gains for December, as evidenced by the Newedge CTA Index up about 1% for the month.
A good portion of those gains will likely be given back after today, unfortunately. This is the same sort of pattern we saw at the beginning of October, when the sharp rally caused losses, and the same stance (although greatly reduced) they had at the end of November. Both of those ended in less than ideal results (although the November move was more an open trade loss than realized losses), and now today is threatening more of the same.
Being In the holiday spirit, we’re looking for a silver lining here – thinking that maybe another failed move lower means we’re just one step closer to the real move happening. As we’ve explained before, traditional managed futures programs with a trend following type profile are designed to participate in many false breakouts, so that they can be certain of being in the real breakout when it does happen.
While each move may be independent of the ones preceding and following it, they aren’t as independent as a completely random event like the flipping of a coin. In that instance, despite the probability of a coin coming up heads or tails being 50% over many, many flips – the fact that the last flip was heads has no bearing on whether the next flip will be heads. We’re not so sure there isn’t some interdependence in market moves, however. Unlike the coin, the fortunes, hopes, and fears of market participants are interrelated and dependent on what has transpired before, and what they believe that experience means for the future. Those interdependences are infinitely complex, and managed futures managers aren’t trying to find the Da Vinci Code to unlock them – but it isn’t too far of a stretch to think that another trend reversal may mean we’re another step closer to the day/week/month when the trend extends, instead of reversing… is it?