Bordering On Untradeable

Includes: OIL
by: Jeff Malec

It's definitely ironic that the commodity market that so many Global Macro and Managed Futures programs were able to find large returns from in 2014-2015, is the same commodity market that is bordering on untradeable in 2016.

From January to April this year, the Crude Oil market is up +1.72%, but not without 15%, 20% and 30% up and down swings thrown in there. This is volatility, which alternatives are supposed to like - but they can be picky about their volatility, it turns out - preferring directional volatility. Moves like the ones we've seen in April, with Crude jumping about 18% in a week, then falling 11% in three days, before rallying back 13% Mon-Weds this week are nearly untradeable for systematic programs.

Why? Well, they're generally not built to find tops and bottoms; they're built to find directional momentum and ride that momentum until it fizzles. When the momentum fizzles in a few days - there's not much models can do. They either get in on the short move, then get stopped out quickly when it fizzles, or pass on the market altogether until the choppiness subsides.

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(Disclaimer: Past performance is not necessarily indicative of future results)

As we've talked about before - systematic strategies don't like V-shaped reversals (see here, here, and here), and especially dislike the W reversal.

Here's to seeing more hockey stick patterns than W's (unless of course it's a Cubs W flag… we don't mind seeing those at all).