September was another good month for the markets as continued easy money, moderate to improving U.S. growth and a decision by the Federal Reserve not to taper its Quantitative Easing program spurred market gains. There is nothing markets seem to like more than easy money and the recent Fed decision shocked market participants and started a pretty good one day rally in stocks and commodities. This easy money will likely continue to push stocks higher.
Overall the EAFE was the star for the month, gaining just over 7%. A declining U.S. dollar relative to the Euro drove foreign stocks much higher than their U.S. counterparts. Post the Fed decision, the dollar has continued to decline.The NASDAQ also did well at 5.06% followed by the S&P 500 and the Dow Jones Industrial Average at 2.97% and 2.16%, respectively.
The higher the volatility of an index (Beta) the better it performed in September as market participants bet on continued market support by the Federal Reserve and other Central Banks around the globe.
The market had already managed pretty good size gains through mid-month anticipating less tapering than had been originally discussed in July and August due to weakness in recent economic reports. However, I don't think anyone believed the Fed would not at least start to taper its massive bond buyback program. This shock spurred a one day market rally like we have not seen in a while.
However, since the announcement much of these gains have been reigned in by the market as participants immediately turned their attention to the fight in Congress over a spending bill to fund the government which has now led to a government shutdown. The shutdown of so called "non-essential" services is being viewed by the markets as most likely lasting only for a short time and being of little consequence. This is the 17th shutdown in the past 40 years, with the last one being in 1995-1996, when the economy was stronger.
What if this shutdown lasts longer than expected? What if this shutdown carries into talks on raising the debt ceiling limits? So far the markets seems to be taking all of this with a grain of salt and they look poised to continue to move higher.
Not to sound like a fundamental investor (one that trades based on data), but the larger backdrop for US stocks remains supportive. The economy is improving, albeit slowly, and monetary policy is extremely accommodative. The S&P 500 Index is priced at 15X 2014 estimated earnings per share, around the long-term average. It is going to take some other event from here or outside the U.S. to upset the apple cart over the balance of 2013!Stock-Signal.com Performance
For trend followers, this past month was a bit of a nightmare. Huge moves in most indexes were not based on trends, but news. In many cases our models had us positioned on the wrong side of the news and this resulted in significant losses in some indexes during the month. This continues to be a very frustrating market to be a trend follower!
You may have already guessed that it was not a historic month for Stock-Signal.com performance. In fact, it was a challenging month as you can see below.
The good news is our sample portfolios both were positive for the month, we just underperformed the broader indexes for the month. After relative outperformance last month, it's hard to give back that performance the very next month, but such is life!
As you can see from the NewEdge CTA Trend Following Sub-index returns, trend followers in general continue to struggle in this current market. We continue to outperformance this index of CTA trend followers!Market Forecast - October 2013
Every month we take a stab at telling you where the markets are going in the next month or two. What we see technically is the possibility for positive returns over the first few days of October and then a more negative period of correction for the markets through the middle of the month. Thereafter more positive seasonality trends take over and I would not be surprised if we were whisked away to new highs over the balance of the year based on the factors I enumerated above.
One thing is starting to get my attention however and that is we are now 4 years into this bull market. The typical bull cycle is 3-5 years.
You have already seen in past posts, that trend followers tend to do well in bear markets (see below). Our strategies have a low or negative correlation to the markets.
See disclosures below for this graph
I say all of this to let you know that I think the next bear market will be a unprecedented in its size! Now you can either look at this as a bad thing or as I do as maybe one of the "greatest wealth creation events" of the past decade (or more).
Yes, trend followers have struggled. However, when a strategy suffers for this long (the past 3 out of 4 years---which is unprecedented) there is usually a return to the mean or average for the strategy. How does it get to the mean, by moving well past the average in the other direction.
I believe this is coming in 2014. So please, please hand in there!DisclosuresNo representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information contained in this material by any person; no reliance may be placed for any purpose on such information; and no liability is accepted by any person for the accuracy and completeness of any such information.Past performance is not an indication of future performance and there can be no assurance that the strategy will achieve results in line with those presented in this performance summary. This document is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.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.IASG Trend Following Strategy Index: For the purposes of this index, established CTAs are defined as having a minimum 3 year documented performance history. The index is not weighted and new managers are added when they reach the 3 year performance requirement. The IASG Index does not represent an actual portfolio which could be invested in, and therefore the index performance results should be deemed hypothetical in nature and for comparative purposes only.MD or Multi-Disciplined Portfolio is a hypothetical portfolio meant to show the impact of mixing trend following strategies, like those used by the managers in the IASG Trend Following Strategy Index, with more traditional strategies like buying and holding the S&P 500 Index. This portfolio has not been adjusted for management fees, commissions or slippage.