Trend Model report card: July 2014

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

I reiterate my disclaimer that I have nothing to sell anyone. Moreover, I am not in a position to manage anyone`s money based on the investment strategy that I am about to describe. (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 When fundamentals and technicals clash).


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 green 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) 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. 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 a preliminary report card of the 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.


July 11.3%, June restated to 1.2% from 1.5%
The results in July was highly satisfying as the account showed a total return of 11.3% while SPY was -1.3%. June was re-stated to 1.2% from 1.5% because I had was showing a preliminary estimated result rather than the value on the account statement. The July figure reflects the account statement value and is not an estimate. I would caution, however, that the July return is overstated by an estimated 2.6% because the account statement values are based on settlement date accounting and trade date accounting, which includes the effect of trades executed but not settled as of month-end, lowered returns by 2.6% and the adjustment will show up in the returns for August.

These positive returns was achieved by:

• Participating in the the stock market stock mid-month; and
• Reversing and shorting equities in the last week as the Trend Model turned negative (see Global growth scare = Trend Model downgrade).

The Trend Model was fortunate in spotting the inflection point in the stock market in July. Deteriorating technical indicators from commodity and overseas equity markets warned of impending US equity market weakness, but I would not expect the model to be so prescient at every turn. The main engine is a trend following model and such models are, by definition, late in picking up trend changes and subject to whipsawing signals, as the disappointing returns in 1Q2014 can attest.


Results continue to be promising

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

• Returns are strong and the Trend Model is performing as expected.
• Returns are uncorrelated with equities (correlation of -0.15 with SPY), bonds (-0.25 with AGG).

While these results are promising, I consider the Trend Model to be untested by stressful markets. The test period that began in September 2013 only includes a stock market that has only gone up. The acid tests for this model is how it behave when the market corrects and when it turns around and starts to rally again.

Should the weakness from last week turn out to mark the start of a corrective period, then the test will have begun. Until then, I would view results with a skeptical eye.


How you can follow Trend Model signals

In the meantime, I would readers who want to monitor the signals of the Trend Model to subscribe to my posts, which include Trend Model updates, by clicking on one of these links on the sidebar or follow me via Twitter @humblestudent: