An Intriguing Trend Model Interim Report Card

Let me start this post with the disclaimer that I have nothing to sell anyone. Moreover, I am not in a position to manage anyone`s money based on the investment strategy that I am about to describe. (If nominated, I will not run. If elected, I will not serve.)

This is an interim report card on my Trend Model, which I haven`t written about for quite some time. For readers who are unfamiliar with my Trend Model, it is a market timing, or asset allocation, model which uses trend following techniques as applied to commodity and global stock market prices to generates a composite Risk-On/Risk-Off signal (risk-on, risk-off or neutral).

Intriguing signal results
We have been writing a weekly report showing the signals of the Trend Model since 2010. To communicate the strength of the signal, We used a dial to graphically represent the Trend Model`s output. If the risk-on signal strengthens, the dial would move to the right and if it weakens, it would move to the left.

When evaluating the performance of this trading account, keep in mind that this is intended to be an absolute return vehicle. While I do show the SPY total return, which includes re-invested dividends, for illustrative purposes, the SP 500 is not an appropriate benchmark for measuring the performance of this modeling technique.

Promising preliminary results
I offer the following observations based on nine months of actual performance:

• Returns were roughly in line with what I expected given the history of the signals. A nine-month return of 13.8% for an absolute return vehicle is promising, but the jury is still out on this trading system. While the return pattern was a little choppy, a quick-and-dirty risk-adjusted return ratio of return (13.8%) divided by maximum draw-down (6.7%) came to 2.1 and that is quite acceptable by most hedge fund standards.
• The low correlation shown by this trading strategy to the returns of major asset classes was also promising. The correlation of the account returns for the nine-month test period to equities (SPY) was 0.13 and -0.10 to bonds (AGG). These results suggest that the addition of such a strategy, in measured doses, can raise the risk-adjusted return of a well-diversified portfolio.
• The weakness of all trend following models is the risk of whipsaw when the market is not trending. When markets are choppy, trend following models will experience sub-par returns. That seems to be what happened in 1Q 2014.
• The real test for this trading strategy has yet to come as stock prices have largely gone in a single direction. Stock prices have been more or less in an uptrend all of the test period that began  in September 2014. The acid test of this trading strategy will occur when the market corrects. I will be watching carefully how it behaves before, during and after the correction.

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None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

Written By: Cam Hui