Category Archives: Trend following

Asset management, Central banking, Economics, Inflation, Market trends, Stock market, Trading, Trend following

The one force moving stock prices and what it tells us about the future

Back when I traded stocks in late 1990s, I got a gnawing suspicion that beyond the nonstop noise of the news flow, there was some force pushing the rising tide, but I couldn’t discern what it was. By today I think I worked it out. The most surprising thing about it is that it’s been so hard to work out.

Stocks are principally driven by money supply

The first time I encountered an explicitly formulated hypothesis that justified my suspicions was years later while I researched for my book, “Grand Deception.” The hypothesis, relating to Russian stocks, was articulated by Bill Browder, CEO of Hermitage Capital Management in his 2006 HedgeWeek interview: Continue reading →

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Asset management, Commodity price, Market trends, Risk management, Trading, Trend following

How we knew yields would collapse?

While most market experts completely failed to predict this year’s collapse in interest rates (see the chart below), we traded the event profitably. In this article I summarize the the hows and the whys of our performance.

AgeOfQE_CTAsVsS&P500vsExperts

How did we know to short US T-Notes starting in Q4 2017, then reverse and go long in November of 2018? Did we know interest rates would first rise, then collapse at the fastest rate in 50 years? Are we so brilliant as forecasters? Did we have insider information? The answer is, none of the above.

We did not know what would happen – but profited from the events anyway. Here’s how: Continue reading →

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Asset management, Behavioral finance, Commodity price, Economics, Hedging, Market research, Market trends, Oil market, Risk management, Trading, Trend following

Failure of price forecasting: the unit of account conundrum

In addition to the better understood challenges of market analysis, like access to timely and accurate data, there is another – rather massive, but usually completely ignored – problem that renders forecasting largely an exercise in futility.

Over the years I’ve written quite a bit on the unreliable nature of price forecasts based on the analysis of market supply and demand . Most recently, in “Market fundamentals, forecasting and the groupthink effect,” I discussed the problem of data quality as well as the very real problem of groupthink among leading analysts, providing an example of a staggeringly wrong oil price forecast they produced. Some of the very same experts later produced this gem: Continue reading →

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Commodity price, Commodity risk, Complexity, Economics, Expertise, Hedging, Market psychology, Market research, Market trends, Oil market, Risk management, Trend following

Market fundamentals, forecasting and the groupthink effect

Last month I had the privilege of meeting with Jaran Rystad of Rystad Energy to discuss strategic cooperation between our companies. On the occasion, he gave me a rather detailed presentation of his firm’s energy intelligence database. I must say, in my 20+ years trading in commodities markets this is by far the most impressive product of its kind I’ve ever seen. Even from the software engineering point of view, I was very impressed. For full disclosure, nobody asked nor encouraged me to write this. Much as you’d recommend a restaurant where you ate well or a doctor you respect, I wholeheartedly recommend Rystad Energy as a provider of energy market intelligence as a matter of giving credit where credit is due.

20190626_wJaranRystadCropped

Monaco, June 2019 – with Jarand Rystad

However, even with top notch data on economic supply and demand fundamentals, divining the future remains difficult and unlikely. John von Neumann rightly said that forecasting was “the most complex, interactive, and highly nonlinear problem that had ever been conceived of.” Continue reading →

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Asset management, Behavioral finance, Market psychology, Market research, Market trends, Trading, Trend following

Trend following might save your tail

In the age of central bank quantitative easing, trend following has become an unpopular investment strategy, even earning tiself a bad name as trend following funds performed miserably compared to bonds, equities, and passive index funds. Below is a chart put together by AutumnGold showing a growing gap between Managed Futures funds the S&P 500 and Barclay’s Aggregate Bond index. Managed futures funds are a good proxy for trend following performance as most of them apply systematic trend following strategies in one way or another.

20190604_AutumnGoldChart

Continue reading →

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Asset management, Behavioral finance, Hedging, Market psychology, Market research, Market trends, Risk management, Stock market, Trading, Trend following

Lessons Of Japan’s 1980s Bull Market

Afer popping, Japan’s 1980s bull market gave way to an 82% drop over the following 20 years.

Three decades later, Japanes equities are still more than 40% below peak valuations.

One of the most effective methods of navigating the boom/bust cycles has been the systematic trend following.

Sooner or later a crash is coming, and it may be terrific

Roger Babson, 5 Sep. 1929

If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail

Jack Bogle, founder of The Vanguard Group

As of December 2018, passive index funds controlled 17.2% of the stock of all U.S. publicly traded companies, up from only 3.5% in 2000. The 5-fold increase was in part the consequence of the ongoing stock market growth, which now has the distinction of being the longest running bull market ever recorded. Buoyed in large part by central banks’ unprecedented quantitative easing (QE) programs, the rising stocks have lulled many investors into complacency.

Continue reading →

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Commodity price, Energy crisis, Hedging, Market trends, Oil market, Politics, Trading, Trend following, War and peace

The coming oil price shock 3: saber rattling in the persian gulf

Side note 1: as oil geopolitics tensions escalate I’ve decided to sequentially number my “coming oil price shock” articles. This is the 3rd one (the first one is here, and second one here.)
Side note 2: if oil price hedging is a headache, please view my presentation here (YouTube, 12 minutes).
  • Trump Administration put their credibility on the line by taking a hard line on Iranian oil exports, pledging to collapse them to zero.
  • Iranian officials matched the rhetoric by promising to close the Straits of Hormuz entirely to oil traffic. A third of world’s traded oil production transit through that choke-point.
  • Assurances of ramped-up oil production from Saudi Arabia and Opec appear as firm as a wet noodle.

 

U.S. taking a hard line on Iran oil exports

Over the Easter weekend we’ve seen an escalation of Trump Administration’s rhetoric toward Iran. On Monday, 22 April, State Secretary Pompeo issued an official statement pledging that after their expiry on May 2, the U.S. would not renew any of the waivers enabling Iran to export crude oil. Iran’s oil exports have already dwindled from 2.5 million barrels per day last April to around 1 million barrels, and the official U.S. policy is to bring Iranian oil exports to zero.

In taking the hard line against Iran, the Trump administration has put its credibility on  the line. Secretary Pompeo followed up the official announcement on twitter, stating that, “maximum pressure” means maximum pressure. Trump backed him up promising “full sanctions…”

Continue reading →

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Commodity price, Commodity risk, Energy crisis, Hedging, Market psychology, Market trends, Oil market, Risk management, Trading, Trend following

Six Principles To Adopting Best Practices In Commodity Price Hedging

  • This week Sinopec disclosed the latest hedging mishap, losing $690 million amid last year’s oil price collapse.
  • Unless price risk management is organized as an integral part of core business operations, it can devolve into eratic and risky game of speculation that can cause massive damage.
  • The six simple but important guiding principles could help commodity firms create a world class risk management process and turn price risk into a source of value and competitive advantage.

This week Sinopec disclosed that it had incurred $690 million in losses in the fourth quarter of 2018. The losses were attributed to Unipec’s oil hedging bets. Unipec clearly took the wrong directional exposure to oil prices in the period when they staged a sharp, 40% collapse (October-December 2018). This much is understandable. However, such losses did not need to happen – I maintained heavy exposure to oil prices over the same period and not only avoided heavy losses but actually generated significant profits by simply adhering to a systematic trend-following model.

Continue reading →

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Asset management, Commodity price, Commodity risk, Economics, Hedging, Market trends, Risk management, Trading, Trend following

How trend following can help industry hedgers: the Palladium edition

Palladium price has more than doubled since the early 2016 making the white metal more valuable than gold for the first time since 2002. Its impressive performance attracted much attention from the financial press, which published numerous articles and analyses about the palladium market. If you diligently read the analyses, you may learn that automotive industry accounts for some 75% of demand for palladium, that its global production is as little as about 200 metric tons per year (vs. about 3,000 tons for gold), that only two countries (Russia and South Africa) produce more than three quarters of its global supply, and that the demand for palladium is expected to continue to grow. Presumably that implies that palladium price should remain high and possibly continue to rise. Continue reading →

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Asset management, Behavioral finance, Risk management, Trading, Trend following

On model risk in quantitative trading

  • Quantitative strategies have become increasingly popular in trading and investing
  • The experience with using them has been mixed, largely as a result of three categories of problems
  • Still, quantitative approach is well worth exploring and offers important advantages to their users

Over the past few years, the use of quantitative strategies has become increasingly popular in trading and investment management. According to JPMorgan, passive and quantitative investors now account for 60% of equity assets under management (vs. 30% ten years ago) and only about 10% of trading volumes originate from fundamental discretionary traders.[1] Appealing new buzzwords like, robo-advising, artificial intelligence and machine learning stoked the imagination of many investors and boosted the quantitative trading gold rush. Continue reading →

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