Trend Model report card: August 2014

Further to my description of the long-short account run based on my Trend Model signals (see An intriguing Trend Model interim report card), here is the report card for that account for the month of August 2014.

I reiterate my disclaimer that I have nothing to sell anyone. I am not currently in a position to manage anyone`s money based on the investment strategy that I am about to describe, nor am I contemplating offering an advisory service based on Trend Model signals. (If nominated, I will not run. If elected, I will not serve.)

For readers who are unfamiliar with my Trend Model, it is a market timing, or asset allocation, model which uses trend following techniques as applied to commodity and global stock market prices to generates a composite Risk-On/Risk-Off signal (risk-on, risk-off or neutral). I have begun updating readers on the Trend Model signals on a weekly basis (for the last comment, see A sweet spot for equities).


Trend Model description
The chart below shows the real-time (not back-tested) changes in the direction of the signal, which are indicated by the arrows, overlaid on top of a chart of the SP 500. You can think of the blue up arrows, which occurred when the trend signal changed from negative to positive, as buy signals and the red down arrows, which occurred when the trend signal changed from positive to negative, as sell signals. Note that this is a real-time (not back-tested) signal record.

Trend Model Signal History

A proof of concept
While the results from the above chart, which represents paper trading, is always interesting, there is no substitute for actual performance. As a proof of concept, I started to manage a small (about 100K) account that traded long, inverse and leveraged ETFs on the major US market averages and, on occasion, sector and industry ETFs. Trading decisions were based on Trend Model signals combined with some short-term sentiment indicators. The inception date of the account was September 30, 2013 and the chart below represents an interim report card of that account.

When evaluating the performance of this trading account, keep in mind that this is intended to be an absolute return vehicle. While I do show the SPY total return, which includes re-invested dividends, for illustrative purposes, the SP 500 is not an appropriate benchmark for measuring the performance of this modeling technique.


A solid mark in the August mid-term: +3.9%
We saw solid results in August as the account showed a total return of 3.9%, which matched the SPY total return of 3.9%.  The account was up 17.2% YTD and 31.2% from inception, which amounts to a track record of only 11 months. However, I would also like to point out that turnover averaged about 180% per month, so this strategy is not for everyone, especially the faint of heart.

I had been concerned about how the Trend Model would behave at turning points, such as a market correction. While I cannot say that it passed the correction test, it seemed to scored a solid mark in its August mid-term. Market participants saw a minor equity market pullback in August, with the SPX down about 4%, though small cap stocks were down considerably more.

The Trend Model was fortunate in spotting the inflection point in the stock market in August. The sentiment models were able to pick up critical turning points in the pullback by calling the top in late July (see Global growth scare = Trend Model downgrade) and the bottom on August 10 (see A tradable bottom).

Results continue to be promising

As with last month, these results continue to be promising:

• Returns are strong and the Trend Model is performing as expected.
• Returns are uncorrelated with equities (correlation of -0.12 with SPY), bonds (-0.20 with AGG).

While these results are promising, I consider the Trend Model to be untested by stressful markets. The stock market has more only less steadily risen in the test period that began in September 2013 and, though the Trend Model returns during the minor August pullback was encouraging, we have yet to see how this model behaves when the stock market undergoes the stress of either a major correction or bear market.

Readers who want to monitor the signals of the Trend Model to subscribe to my blog posts here, which include Trend Model updates, or follow me via Twitter @humblestudent.