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Jeff Diercks
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Jeff Diercks, is an investapreneur and recovering CPA. He actively trades his own money and manages the assets of a select group of clients at InTrust Advisors, a Tampa, Florida based wealth management firm focused on trend following and price momentum strategies utilizing ETF securities. Mr.... More
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  • Performance For May 2014

    How does one put a positive spin on a disappointing month? Well, if you bought and held, you had a good month! I guess that is something!

    Our Strategies had a tough month. Why?

    Once again Central Bankers propped up markets with the mere mention of Quantitative Easing (QE) and lower interest rates. The biggest culprit this month, the European Central Bank (ECB) which meets in June and will likely lower interest rates and begin its own QE program.

    Like drug addicted teens, the markets soaked up the news of this possible easing and drove markets higher. Surprisingly though in looking at the numbers, the foreign markets trailed the U.S. in the month of May.

    So why is this?

    I believe for one that it may be too late in reality to move European growth higher despite this possible last ditch effort by the ECB and the markets know it. Just look at this anemic growth in manufacturing in Europe. According the Business Insider, "While some countries are doing well (EG Spain), the big powerhouses like Germany and France aren't so great. German manufacturing has slowed to a 7-month low. Meanwhile, France is at a 4-month low, and it remains in contraction."

    The following chart from Markit says it all (declining manufacturing growth in most European countries):

    (click to enlarge)

    Secondly, I believe U.S. markets outperformed for one simple reason. Our growth has slowed and this same group of drug addicted teens (the traders) bid up overextended stocks in hopes that the Fed might once again add QE to our economy.

    First quarter GDP growth in the U.S. was revised down to -1% from a previous estimate of 0.1% just last week. One would expect a sell off on such news, but instead stocks rallied. You tell me how this makes sense unless market participants are hoping to see the Fed curtail its measured reduction in QE or even begin a new QE program?

    The sad truth is developed countries including the U.S., Europe and Japan are in a race to debase their currencies. U.S. dollar strength in recent weeks can be blamed solely on the job Japan and Europe have done in debasing theirs faster than we can debase ours.

    As one market commentator I occasionally follows likes to say, "how can rates be going down and the Fed supposedly is reducing QE? There is just now way folks this is happening."

    Quite frankly, he is probably right. We have already seen evidence that the Fed is manufacturing buyers for treasuries in collusion with the other Central Banks of the world. See former Assistant Secretary to the Treasury, Paul Craig Roberts, article "The Fed is the Great Deceiver" for proof on this front.

    I have said it before and I will say it again "this my friends is all going to end very badly!" Performance

    I mentioned, above, that had a tough month. Technically, here is what is happening.

    Besides just general confusion among market participants about the direction of the U.S. and global economy, which is creating significant intra and inter-day volatility. Many trend followers, like, employ a multi-signal process for many market indexes. Our signals works both off price movements and the force of those movements. They must both confirm a signal change.

    Last month, most of the gains were on very low volume. Lower volume versus prior months and prior years. In other words there was not much conviction in the moves.

    So despite us getting buy triggers on the pure price signals, we did not get confirmation from the secondary signals, which remained weak. In English, prices moved higher, but there was not enough volume/market participation to trigger our secondary signals.

    It was killing me all month to sit and see prices move up, but my hands tied from participating.

    See our performance below:

    The good news, if there is any, is that the market fundamentals are starting to fall apart. I believe we could be witnessing a top (or at least a significant correction) in the making here. I make the bulk of my call based on the way markets are trading and the fact that despite elevated risk, the Volatility Indexes continue to falling.

    Courtesy of RMG Wealth Management

    This chart shows a lack of fear by market participants and even more scary a return of volatility to levels not seen since the top of the bull market in 2007.

    Also the number of bulls vs. bears in the recent American Association of Individual Investors (AAII) survey shows an excess of bullish sentiment. Historically this has meant a correction at least is forthcoming.

    (click to enlarge)

    I even read recently that some trend followers are modifying how they manage money to stay in the game. When you see managers changing the way they manage money, this is a dead giveaway the end is near!

    So why would this correction (or maybe a bear market) be beneficial? One, if you are following our signals you are likely hedged using our sample portfolios. Two, we are already prepared and could easily shift to net short as our models confirmed a down move. Three, every dog has its day and we are overdue to have one!

    Our Market Forecast

    Our forecast at this point remains unchanged from prior months. I really do see the possibility of a pretty good correction over the summer that may turn into a Bear Market. If not, I would expect a larger correction since we have not had a significant one since the summer of 2011.

    So hold onto your hats and don't buy the mantra that "as long as the Fed is behind us how can harm us." I believe this time it may be different!

    Jun 03 8:24 AM | Link | Comment!
  • Mr. Market's Assault On Trend Followers

    Mr. Market is a cruel taskmaster and he has been especially cruel on those who earn their living following market trends over these past five years. He has provided so many mixed signals that about the only thing investors can agree upon is that eventual this is probably all going to end very badly!

    Mr. Market strength has been amazing! Time and again he has saved the stock markets from any kind of corrective action, just as trend following models flash sell or short. He has been vindictive as he has then hits the accelerator on his powerful market tools to speed away from those poor trend followers who must now wait on their models to reset to get with the new trend.

    Always one step ahead, he allows them to get in sync, just in time to slam them with another fast corrective move. So frustrating! So managed!

    Is it any wonder the trend follower is Mr. Market's target? During the 2007-2009 Financial Crisis, the trend followers were the "belle of the ball", many gaining 50%+ returns in 2008. (see blue box in chart below) So it will be again someday soon one would think, but when Mr. Market?

    In Mr. Market's mind, if he is to take from the rich (i.e. every investor), he must make sure no one profits from the next melt down. This extended drought for the trend follower is no doubt Mr. Market's attempt to make sure that not one survives.

    Well I've got news for you Mr. Market, we will survive and we will profit and protect client assets in the next major meltdown. A meltdown I think grows closer everyday!

    Until that day, here is how the sample model portfolios have done versus the trend followers and Mr. Market (as measured by the S&P 500): (little kids may want to cover their eyes!!)

    You can also clearly see the outperformance in the past financial meltdown. You can also clearly see the market under performance since.

    They say markets are mean reverting. So where are you going to put your money with the current bull now running longer than the average bull market in terms of months? At this point, I think the safest place to be is right here!

    Disclosures:PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE performance is proforma based on the signals generated from our trend following models and does not take into consideration the cost of commissions, slippage or exchange fees. Neither the Equal Weight Stock-Signal Strategy nor Global Opportunities Stock-Signal Strategy are generating actual performance, just back-tested performance.The Equal Weight Stock-Signal Strategy is a portfolio equally weighting trend following signal positions in the Nasdaq Composite, S&P 500, High Yield and EAFE Indexes. Each position has a separate trend following model and can be either long or short at any given time.The Global Opportunities Stock-Signal Strategy is a portfolio that is composed of 15% S&P 500, 15% Nasdaq Composite, 15% EAFE, 15% High Yield, 15% DB Commodities, 15% Gold and 10% U.S. dollar. Each position has a separate trend following model and can be either long or short at any given time.The Newedge CTA Trend Follower Sub-Index is equal-weighted and reconstituted annually, and has become recognized as the key managed futures performance benchmark. The index calculates the daily rate of return for a pool of trend following CTAs selected from the largest managers open to new investment. The index is designed to accurately reflect the performance on the managed futures space.The Nasdaq Composite index is a market capitalization weighted index of more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.The S&P 500 is a capitalization weighted index of the 500 leading companies from leading industries of the U.S. economy. It represents a broad cross-section of the U.S. equity market, including stocks traded on the NYSE, Amex and Nasdaq.The MSCI EAFE Index is a benchmark of international equity performance. It represents 21 MSCI country indexes, representing the developed markets outside of North America: Europe, Australasia and the Far East.The High Yield index is really the iBoxx USD Liquid High Yield Capped Index which consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe.The Deutsche Bank (NYSE:DB) Liquid Commodity Index (DBLCI) was launched in February 2003. It tracks the performance of six commodities in the energy, precious metals, industrial metals and grain sectors. The DBLCI has constant weightings for each of the six commodities and the index is rebalanced annually in the first week of November. Consequently the weights fluctuate during the year according to the price movement of the underlying commodity futures.The London Gold Index is an index of daily price fixings of gold as determined by the the five members of the London Gold Pool (Scotia-Mocatta, Barclays Capital, Deutsche Bank, HSBC and Société Générale). The London spot fix price is the price fixed at the moment when the conference call terminates.The U.S. Dollar Index is a measure of value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. Currently, this index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period.
    May 28 4:45 PM | Link | Comment!
  • Sell In May And Go Away?

    I thought this was a pretty interesting chart from The old adage says that traders should "sell in May and go away." According to the Stock Trader's Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

    At least over the past five years, this strategy would have cost you money. The cost of selling (transaction costs and taxes) was not rewarded by the market (which was a net positive) over that period.

    The chart does clearly shows an historically negative bias in May and August over the past five years. So be careful!

    (click to enlarge)

    June is barely breakeven over the past five years and surprisingly September and October are positive. I think if you took this back a few more years, you would see negative returns in September and flat returns in October.

    Also check out my Market Update video from last week for more on the "Sell in May and Go Away" seasonality pattern. I used to be skeptical this pattern would repeat, but over the course of my career I would say it happens more than not.

    May 09 4:09 PM | Link | Comment!
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