Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Orange Juice
- Russian Ruble
- Canadian Government Bonds
- Italian Government Bonds
- German Government Bonds
Last week’s reversing trends:
- Mexican Peso
- Silver
- The New Zealand Dollar
- Taiwanese Stocks
- German Stocks
What we are taking note of:
No trend ever goes on smoothly from beginning to end. Trend-following would be too easy, everybody would be a trend follower, and returns from trend following would shrink to nothing. There are always hiccups, whipsaws, bear market rallies, and bull market sell-offs that add noise and uncertainty to trends. Trend following lives on the edge of chaos, eking out a small signal from the sea of noise and randomness in financial markets, harvesting that signal patiently in the face of turbulence.
The week of September 25th gave us a taste of the pain of trend following. The week started with a sell-off in US technology stocks that have been soaring since the market bottom in March. The weakness spread to the rest of the US stocks, which triggered a small drop in bond yields and, more importantly, a rise in the US dollar. Ironically, falling US stock prices lead to a stronger dollar; such is the logic of financial markets which see the US dollar as a haven at times of increased risk.
To compound the irony, the price of gold also dropped. In 2020, gold has not acted as a risk diversifier. Instead, it has been rising and falling in tandem with US equities.
By the end of the week, US stock prices recovered, with the Nasdaq index ending the week higher than it started. But the secondary effects of the first sell-off haven’t reversed. The US dollar is still up, gold is still down, bond yields are still down. Macro commentators have a hard time making sense of it all.
How are we heading into next week?
We will not try to decipher the hidden logic of financial correlations. We will continue to follow our discipline, close positions that have moved too much against us, and stick with positions that haven’t. In the long term, that serves us best.