Commentaries

2018-10-31
/
Categories: Commentaries
/
Comments Closed

Polaris

The Polaris program encountered a significant speed bump in October losing -5.95% (net). Of the four sectors traded (Commodity, Currency, Equity and Interest Rate), unsurprisingly, equity trading was hardest hit, given the significant trend changes which occurred intra-month. Moreover, as Polaris is a trend-based strategy, most of the systems which make up the program incurred setbacks.

Suffice to say that equity volatility was a major theme playing out in October. While some bearish sentiment had made its presence known in September, the month had concluded, and October began with a 5-day up streak and the Dow closing on the 3rd at another all-time high. This only proved to be the calm before the storm despite or perhaps the more appropriate wording might be due to, at least from a US standpoint, some strong economic reports. The monthly unemployment numbers released (as always) on the first Friday of October indicated that unemployment in the US had fallen to its lowest levels since 1969. A Wall Street Journal (WSJ) article (“US Unemployment Rate Falls to Lowest Level Since 1969” by Eric Morath & Harriet Torry) cited:

Unemployment rates below 4% are extremely rare in 70 years of modern recordkeeping. …Federal Reserve officials believe the current period can be sustained. …Unlike the 1960s and, central to their outlook, Fed officials estimate inflation will remain subdued, allowing them to keep short-term interest rates relatively low. …Bond investors have become worried about the interest-rate outlook in recent days. With the economy running so strong they have come to the conclusion that the Fed will keep raising short-term rates to keep it from overheating.

By October 10th, the market had tallied five consecutive down days, and the 5th was quite a doozy – off more than 800 points – fueled in part and further put off by those rising yields. It’s not just the case that the Fed had recently and overtly raised rates in late September, but also that is doing so “covertly,” courtesy of its desire to exit the quantitative easing business. These “behind the scenes” transactions (or the lack thereof) in conjunction with their straightforward once- a- quarter hikes are contributing to accelerating rates. A CNBC article by Patti Domm published on October 12, “There’s another big reason why Trump could blame the Federal Reserve for rising interest rates,” details the Fed’s reduced presence as a buyer in the Treasury market.

Since last year, the Fed has been gradually reducing the purchases it makes to replace Treasury and mortgage securities on its balance sheet as they mature. …In an effort to help the economy and add liquidity to markets, the Fed loaded up on those securities during the financial crisis… It took the Fed another 3 years to start unwinding… Bond market pros say it’s difficult to gauge just what type of impact the Fed has had on rates, but it’s getting more attention since the slowdown in purchases comes at the US government’s borrowing needs are dramatically rising.

This article goes on to summarize the across-the-board approaches being taken by the major economies regarding their respective quantitative easing (QE) policies. Japan’s central bankers are still in QE-mode but are mainly purchasing their own bonds. Europe is striving to unwind QE, but much less aggressively; thus, they’re not a major purchaser either right now. With the Fed aggressively reducing its purchases and the US deficit expanding greatly, the lack of buyers could make for an interesting 4th quarter for the bond markets.

Another theme playing out was in the energy complex where Crude Oil had continued its surge upward, bolstered by both the pending Iranian oil sanctions and upbeat global growth projections. In fact, the WSJ posted an article by Gunjan Banerji on October 8th entitled “Traders Bet on Return of $100 Oil.” Two weeks later, Oil had taken a beating with the explanation being concerns centered around oversupply and global economic growth.

Commodities:    -2.32% (gross)

The energy complex was by far the biggest contributor to sector losses and, drilling deeper, trading in Crude Oil and Gasoline markets were hardest hit. Polaris held long positioning across the spectrum. The sudden change of bullish sentiment was helped along by what appeared to be a somewhat unexpected announcement by the Saudi energy minister, via a Russian news agency interview, that his country intended to increase production. A WSJ article (“Oil Drops More Than 4% on Prospect of Higher Saudi Output” by Stephanie Yang and Christopher Alessi dated October 23, 2018) explained it this way:

“That rhetoric draws parallels to OPEC’s strategy that helped crash crude prices lower in late 2014, though today’s market has much more limited spare capacity and lower overall inventories,” said analysts at Schneider Electric.

This news coupled with equities tanking resulted in a 4.2% one-day drop in oil prices on October 23rd and a 12% dip overall for the month. As shown in the charts below, the September rally was completely erased by the drop in October in Crude Oil and though modestly less for Gas Oil, still amounted to quite a reversal.

Currency:    +2.03%    (gross)

Holding primarily long dollar positioning provided profitable windfalls, helping to counteract some of the damage from energy and equity trading. Only Japanese yen and Mexican peso (the sole short, USD, held in the portfolio until switching at mid-month) detracted from the results. US rates continued to rise due to multiple Fed machinations both in front of and behind the scenes. Combined with a “flight to quality,” the USD continued to show strength relative to other currencies, as is shown in the ICE Dollar Index.

Equities:    -6.54% (gross)

In addition to the aforementioned issues, the ongoing trade war saga with China together with disappointing Chinese growth reports had investors spooked. Chinese government officials made supportive announcements to calm the markets which temporarily helped. An October 24 Morgan Stanley (MS) white paper summarized how market volatility is impacted by several events. As this was a corporate quarterly reporting season, MS explained that companies with disappointing earnings were punished for missing expectations far more than companies were rewarded for exceeding analysts’ projections. The paper went on to add that a disappointing home sales report, the alleged Saudi government’s involvement in a murder conducted in its Turkish embassy, and Italian budget discussions all helped to sway bearish sentiment. Despite the “monthus horribilis,” there are still equity bulls out there. An article published by Byron Wien on the RealClear Markets website on October 26th concluded his upbeat equity outlook this way:

…I believe we are going through a necessary correction prior to the next upleg, which should occur after the mid-term election regardless as to whether the Democrats take control of the House of Representatives or not. Earnings will continue to drive the market and the prospects for earnings growth in the US for 2019 remain strong in spite of what is happening elsewhere in the world.

Although this summary highlights all the volatility this month, in all actuality, volatility indices had a very muted reaction to all these market machinations. An interesting article published on the last day of October in the Wall Street Journal supported Mr. Wien’s bullish assertions as well as Morgan Stanley’s commentary on sell-offs impacting only certain stocks. Entitled “Panic in Stocks? Options Signal No” (by Gunjan Banerji), it affirms:

An unusual dynamic in options markets is signaling that investors aren’t panicking despite October’s stock-market drubbing: Expectations for volatility are greater in individual companies than the broader market. …This earnings season, options investors are pricing in some of the biggest swings from specific stocks since 2015, according to Credit Suisse Group AG. …A few heavyweights like Amazon.com, Microsoft Corp., Apple Inc, and Alphabet Inc. made up the bulk of losses in the S&P 500, according to Wells Fargo Securities. …Meanwhile, moves in the Cboe Volatility Index have been relatively muted compared with the stock fall, analysts say. The measure known as VIX tracks expected swings in the S&P 500 and is known as Wall Street’s fear gauge. Measures of volatility in oil, currencies and US interest rates also remain relatively low – another sign that investors aren’t as fearful as the month’s declines might indicate.

The Polaris Program’s Asian holdings were primarily long in Japan (recall the strong rally Japanese equities experienced in September followed by the huge October drop – see OSE Nikkei 225 Index chart below) and India; short in China and, in Europe, essentially short except for France, Amsterdam and UK equity indices, but by month end the program was short most of Asia and Europe. In the US, the program was long to start and ended the month with mixed positioning. The bearish stance in Chinese equities and in a few European markets (German Dax and Spanish Ibex) did provide some profitable results but were far outflanked by the losses in Japan (which had experienced a very strong bullish run just last month) and US equities trading. The NASDAQ futures positioning was the hardest hit of all, aided by the significant sell-off in the US technology stock complex.

Interest Rates:     +0.92 (gross)

Positioning here aligns pretty closely with the extent to which Japan, Europe, and the US are unwinding (or not) their respective central bank QE policies. In Japan, the program began and maintained a bullish stance throughout the month. In Europe, positioning tended to be mixed throughout, and here in the US, it was resolutely short across all timeframes. The best trading results came from the US positioning.

Returning to the CNBC article, Jeff Gundlach, CEO of DoubleLine, was quoted, “Investors are starting to realize just how many bonds are coming at us in the year or two ahead.” His tallying of all the US government debt coupled with the Fed’s quantitative easing exit adds up to “around $2.25 trillion of debt increase.” With a glut of bonds here in the US, prices will have to decrease. Thus, rates should continue to move higher which, in turn, could present some profitable opportunities for trend followers in this sector.

Read More
2018-10-31
/
Categories: Commentaries
/
Comments Closed

Eta Carinae

Eta Carinae, a global equity focused program, was down -6.70% (net) in October. A major trend reversal had the program struggling to gain its footing with Japanese and (some though not all) US trading hardest hit. All three geographic regions (Asia- Pacific (APAC), Europe (EU) and North America (NA)) finished in the red this month. The program’s break out systems had mixed results, as some managed the conditions ably while others struggled. The same could be said, surprisingly given the reversals, of the long-term trend following systems. The mean reversion models were tripped up all around. In the second half of the month, a new component was added to the program: Volatility. A new volatility market and model were introduced and will likely maintain a presence in the hopes of providing greater overall stability to the return stream.

To recap: September’s “rattling of the cage” was but a prelude to the equity turbulence which followed. October opened seemingly looking like all was back on track in US equities, but this was just the calm before the storm. A fantastic unemployment number (showing drops to levels unseen since 1969) shifted concerns to rising interest rates. The culmination of a 5-day slide occurred on the 10th when the Dow dropped 800 plus points. This was just about the time quarterly earnings reports were starting to be released, and investors were in no mood to ignore any possible harbinger of bad tidings ahead. Also contributing to the overall malaise were poor economic reports released in China, which impacted Japanese equities. Meanwhile in Europe, the European Commission continued to wrestle publicly and privately with the Italian government’s still unresolved budget agenda.

Asia-Pacific (APAC):    -4.95% (gross)

Eta Carinae came into the month long much of Asia, including Japan where equities had shot straight up in September (see SGX Nikkei 225 chart below). As positively as this positioning had contributed to Eta Carinae’s overall robust finish last month, it delivered a devastating blow and then some to the program this month. The same could be said for Japanese stocks as the indices (again, refer to SIMEX Nikkei 225 chart below) incurred a “whopper” of a reversal, relinquishing all of September’s gains and dropping further still until finding support just above February’s lows. Factors contributing to the brutal month were certainly America’s sell-off coupled with contagion fears from the slowing of China’s economic engine. Perhaps, too, some investors may have questioned the Bank of Japan’s (BOJ) unwavering commitment to quantitative easing, so much so that the BOJ felt its stance needed to be defended publicly. To that end, a MarketWatch article (“Japan’s Nikkei leads heavy losses in Asia stocks as global woes mount” published October 25th) noted:

…While concerns are growing that the Bank of Japan’s prolonged easing may be causing financial overheating, BOJ Deputy Gov. Masazumi Wakatabe says it’s still debatable whether the central bank should tighten monetary policy as a preemptive measure against rises in asset prices. “Although we should not ignore asset price fluctuations completely, taking a strong measure to burst the bubble could push the economy into a serious recession,” he said in a speech at a Japanese university, looking back at Japan’s financial crisis in the 1990s.

As for the poor Chinese third quarter gross domestic product report, excerpts from a Wall Street Journal (WSJ) article (“Chinese Stocks Surge After Xi’s Economic Czar Leads Calls for Confidence” by Shen Hong published Oct 19, 2018) cited the unusual efforts by Chinese officials to maintain calm. The report noted the withering interest in the Chinese stock market by the average retail investor.

Chinese stocks rallied, despite disappointing economic data, after a rare joint effort by top officials to soothe investors. …Stocks rallied after Vice Premier Liu He, President Xi Jingping’s economic czar, called for confidence in China’s economic outlook… The barrage of reassuring messages came as data showed China’s third-quarter gross domestic product was up 6.5% from a year earlier, off from the second quarter’s 6.7% pace, and the weakest since the global financial crisis. …The decline has been a slow grind, exacerbated by rising trade tensions and domestic economic concerns-fundamentally different from 2015’s abrupt rout. …For sure, pessimism is rife among China’s 90 million retail stock investors. However, there is little panic, nor the public outrage or frustration that has previously triggered quick official responses to restore financial and social stability. …And many retail investors have simply given up: Daily trading volume tumbled to 239 billion yuan Thursday…

 

Europe (EU):        -0.28% (gross)

EU trading was the best of the worst but still down. Positive results were garnered via short positioning in the German Dax and Spanish Ibex indices but were outflanked by French (long throughout October) and Amsterdam Exchange (mixed positioning) trading. Although this sector contributed the least to the problems last month, there was a question as to when the sideways to slumping EU markets will emerge from their respective ruts. In a brief but interesting article posted October 22nd in the WSJ (“Eurozone Squabbles are a Problem for Stocks, Not Bonds” by Jon Sindreau), the author commented on the issue while observing the European Commission’s displeasure with Italy’s proposed budget:

News of the eurozone’s demise is exaggerated, but that may not offer much comfort to stock investors. …Yet when it comes to eurozone stocks, which are more tightly linked to economic prospects, the latest political spat should give investors pause. …The eurozone’s problem has always been about economic growth, not deficits. Between the year 2000 and now, the total amount of Italian government debt has actually expanded at a much slower pace than its peers, thanks to smaller deficits. Italian figures only look worrisome as a percentage of output because the country’s economic performance since joining the euro has been so dismal. …Right now, European officials seem ready to let slide – as they have many times in the past – over-optimistic deficit projections in the budget of the new Spanish government. Yet in Italy, their instinct is to come down hard on a populist government they dislike… Global investors have long applied a discount to European equities. As long as eurozone policymakers seem more intent on delivering discipline than prosperity, that looks unlikely to change.

North America NA:    -1.35% (gross)

The bulk of the losses for this sector was due to S&P 500 index trading. Eta Carinae began the month flat. With a rally in the first few days, it built up a long position, only to see it wiped out when sentiment turned starting on the 5th of October. Positioning was quickly stopped out but then rebuilt just in time to be long on the 10th. Such was the way the month proceeded, with some long positioning remaining through the 24th where again another round of bearish sentiment hit US markets. To a much lesser degree, trading in the Russell 2000 (small cap) futures contract incurred setbacks as well. However, the “in-between,” short positioning entered into on the second day of trading in the E-mini S&P MidCap 400 and held throughout, was a buffer against some of the downside.

With US unemployment at decades-long lows, the US economy seemingly humming along and corporate earnings that were not exactly horrific, why was the timing ripe for a market sell-off? For those of us with a superstitious bent, there’s the déjà vu “beware the ides of late September and October” historical sort of vibe that seems to blow this time of year, based on the timing of some of the more notable market implosions of the past. A more cerebral response came courtesy of a Morgan Stanley (MS) market recap white paper distributed to its clients on October 24, which theorized that market volatility was impacted by several events. Referring to the quarterly corporate reporting season, MS explained that companies with disappointing earnings were punished for missing expectations far more than companies were rewarded for exceeding analysts’ projections. The paper went on to add that a disappointing home sales report, the Saudi government’s alleged involvement in a murder conducted in its Turkish embassy, and Italian budget discussions all helped to sway bearish sentiment.

Volatility:

At mid-month, a new market, the Chicago Futures Exchange VIX (volatility index), was added to the portfolio. While trading in the VIX contract was not able to fully neutralize the losses, it did generate a positive return stream as it caught the upward trend in volatility (see CFE VIX chart below) that began around mid-month.

A new volatility model also was added to the model basket. The volatility model completed the month essentially breaking even.

Read More
2018-09-30
/
Categories: Commentaries
/
Comments Closed

Polaris

Polaris was down -0.15% (net) for September. Despite the modest setback, Polaris closed the books on Q3 with solid outperformance versus the SG CTA index this month and throughout the quarter. September did provide some headwinds with low signal-to-noise (SNR) readings (a measure of trend strength where low equates to lack of trend) throughout in all four trading sectors (Commodities, Currencies, Equities and Interest Rates), yet the program navigated a less trend-friendly environment respectably. In fact, the longer term systems were the least impacted by conditions, with intermediate-term trading models trading profitably and long-term models essentially flat. The short-term systems struggled more with mean-reversion systems, recording modest losses and short-term breakout models

the most challenged this month. All-in-all, as we look ahead to the last quarter of 2018, there is reason for optimism.

The major news themes playing out to start the month included a focus on weather (a devastating typhoon in Japan and a major hurricane in the US), ongoing trade war rhetoric between the US and China, lack of progress between the US and Canada in hammering out a new NAFTA deal, and the new Italian government’s budget negotiations. In addition, central banker banter in Japan and actions in Turkey and the US caught the attention of bond, currency and equity markets.

Prior to the trading roundup, we’d again like to share with you some interesting readings which caught the attention of our research group. They include:

  • A Critical Review of Recurrent Neural Networks for Sequence Learning, by Zachary C. Lipton, May 29, 2015 
  • “Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly,” by Malcom Baker, Brenda Bradley, and Jeffrey Wurgler, Financial Analyst Journal, Vol 67, Number 1
  • “Wiggins: Detecting Valuable Information in Dynamic Networks Using Limited Resources,” by Ahmad Mahmoody, Matteo Riondato, Eli Upfal 

Commodities:    +1.05% (gross)

Portfolio positioning in commodities at the start of September was long energies and short metals and agricultural markets. Throughout the month, commodity VaR exposure increased by about 40% as some strong trends did appear in the energy markets which were the sole performance drivers. There were a few price reversals intra-month to keep things interesting, including at the start as oil prices sank when a tropical storm headed for the US Gulf Coast did not materialize (as feared) as a hurricane. Later, rumors and reports that OPEC and non-OPEC nations were planning to boost production caused another price reversal. By month end, however, as the NYMEX Light Crude Oil chart below indicates oil prices hit new (multi-year) highs. In fact, a Wall Street Journal (WSJ) article (“Oil Edges higher to Close Out Third Quarter” by Christopher Alessi and Amrith Ramkumar, dated September 28, 2018) noted that oil’s global benchmark was on track for a 5th consecutive quarter of gains citing indicators that lean more in the direction of a global supply deficit as the primary reason. Those indicators include: (1) Iranian oil exports are declining in anticipation of US sanctions which will take effect in early November; (2) OPEC and other oil producing nations have been cryptic regarding how much they intend to raise production; and (3) US officials have not shown an inclination to tap into the country’s strategic oil reserves anytime soon.

While incurring modest losses in metals trading, gold trading was profitable. In looking at the COMEX Gold price pattern in the chart below, it wouldn’t initially jump out that our trading results would come in positive for this month. The chart also highlights some of the rather trendless trading conditions encountered this month. Gold did, however, manage to find a trend at month end, selling off courtesy of the Federal Reserve’s interest rate hike.

Trading in agricultural products was essentially flat.

Currencies:     +0.35% (gross)

Polaris maintained a “long US Dollar (USD) versus (any) global currency” stance throughout the month, and the VaR did increase over the month by about 22.5%. Central bankers provided a major assist for our positioning this month. Turkey’s central bank was the sole exception with its decision to raise the nation’s prime rate to 24% rather than the expected 21% levels, but our USD/Turkish lira trading losses were minor. The biggest trading gains were garnered from our Japanese yen/USD and Swiss franc/USD trading. The Bank of Japan’s Governor Kuroda confirmed at the start of September that he had no plans to raise rates “for quite a long time,” and to close out the month, the US Federal reserve raised the US prime rate. The ICE Dollar Index chart below is another example of where the price moves were not going our way for much of the month, yet the program still managed to generate positive results.

Equities:     -0.51% (gross)

The program maintained its long positioning globally and the highest VaR exposure in this sector, although it did decrease slightly (8%) by month-end. The bipolar-like reactions to every trade-related utterance made by government officials explained some though not all of the reasons for the losses sustained in this sector. On the bright side, Japanese equity trading posted strong returns and contributed greatly to keeping the downside manageable for this month. After processing the tragic news of one of the worst typhoons to hit Japan in 25 years, the SIMEX and Osaka Nikkei indices shot straight up (see SGX Nikkei 225 chart below). Japan’s Central Bank’s confirmation that it had no plans to raise rates provided some of the momentum as a weaker yen would help Japanese exports. A short article in the WSJ (“Paladium Rally Leads Sudden Rebound in Metals” by Amrith Ramkumar, dated September 24, 2018) primarily explained the persistence of the bullish run in the palladium market over the past 7 months, but it also shed a bit of light as to why this small metal market may have provided support for Japanese and Chinese equity rallies this month. Palladium is used heavily in the auto industry and as the article goes onto say:

Investors look at industrial metals-widely used in manufacturing and construction-broadly to gauge growth world-wide. A months-long price slide in these markets had eroded investor confidence, pushing money managers int US assets throughout the year.

Yet recently, some analysts appear much more confident that a full-blown trade war and slowdown in China won’t materialize. Japan’s Nikkei Stock Average just had its best two-week stretch since July 2016, and the Shanghai Composite logged its best week in 20 months.

Although Japanese markets rallied, September was not as kind to India’s Nifty 50 index, which underwent a major reversal since attaining new highs this summer and provided the program with its biggest trading losses. The market tanked in September under the weight of rising oil prices, the rupee weakening to its lowest level ever vs USD and liquidity concerns related to India’s non-banking financial companies. Hong Kong’s Hang Seng Index also had a rough month and quarter and is down overall on the year since reaching new highs in January. A weak yuan and Hong Kong dollar and trade war concerns have kept the index in bearish territory.

Over in Europe, trading results were again negative. The chart of the Euro STOXX 50 Index helps to highlight the reasons as the Euro STOXX ended September at about the same levels where it started, but the ride in between was rollercoaster-like. Losses were sustained not only in this market but in (Spain’s) Ibex, (the UK’s) FTSE and the (German) Dax. The only market with a positive result was (Italy’s) MIB-30.

In US trading, it was the Russell 2000 which dragged on what was otherwise profitable trading in North America. The trendless price movements (illustrated in its chart below) chopped away at profitability and the index closed lower on the month. Despite our long positioning in this midcap index not being opportunistic this month, the raging US bull market cannot be attributed entirely to the FANG-effect (FANG=Facebook, Amazon, Netflix and Google) as this WSJ article (“It’s Not All Tech. Small Stocks Are Powering the Market Higher” by Corrie Driebusch, dated September 16, 2018) cites:

Signs of stock market breath are everywhere investors and analysts say: Smaller-company stocks have climbed more than their larger counterparts this year. …Among the quiet winners in the current market are midsize companies. When divided into five groups based on market value, the second and third quintiles of the Russell 1000 index are outperforming the top quintile that houses the biggest stocks, according to data compiled by Strategas Securities LLC. …Indeed, without the 10 biggest contributors – which includes Amazon, up 68% – the S&P 500 would be trading higher. The equal-weighted index, which gives the same weight to both the smallest and largest companies in the index, reached a record in late August – the same day as its more closely followed counterpart.

Interest Rates:     -0.93% (gross)

This sector continues to be a drag on overall performance and, unsurprisingly, ended the month with the lowest VaR exposure of any sector, incurring a 22% drop along the way. There was mixed positioning here as Polaris was long European Union (EU) bonds across all time frames and short all the US interest rate markets. As can be seen via the September price trajectory of EUREX Euro-Bunds in the chart below, being long the Bund was not a boon to the program. Trading in (German) bonds in all time frames, (British) gilts and French government bonds contributed sizeable losses. The European Central Bank (ECB) continues to want to exit the “easy money” policies which all central banks employed for almost a decade, but it has greater challenges in moving forward as aggressively as the Federal Reserve because EU growth has been muted, and the ECB now sees yet another possible hurdle as to whether the new Italian government’s level of inclination to show any kind of budgetary restraint. As for the Bank of England (BoE), there is better economic growth which brings with it inflation concerns, but it has remained hesitant to pursue rate hikes because of the imminent approach of BREXIT. Still, reports published in September indicated that inflation is accelerating in the UK, which had investors expecting the BoE to make a move and, invariably, translated to gilt prices moving inversely to the expected rate increase. Fortunately, US positioning helped to neutralize some of the losses as the strong economic results in the US have allowed the Fed to pursue a more aggressive rate hike policy. The CBOT 5-year chart shows the smooth trend that US bonds had for most of the month and explains the profitable results in US interest rate trading.


Read More
2018-09-30
/
Categories: Commentaries
/
Comments Closed

Eta Carinae

Eta Carinae (EC) was up 1.85% (net) for September. The positive performance was all the more appreciated given the headwinds from relatively inhospitable overall conditions in EC’s global equity trading universe. Throughout the month, the equity sector registered low signal-to-noise (SNR) readings (a measure of trend strength where low equates to lack of trend). Fortunately, there was a lone bright spot in this month of less-trendy conditions as Asia Pacific (APAC) markets provided very robust opportunities to counteract the less friendly environs in Europe (EU) and the United States (US).

Themes that impacted equity market movements included weather (a devastating typhoon in Japan and a major hurricane in the US), ongoing trade war rhetoric between the US and China coupled with concerns surrounding the lack of progress between the US and Canada in hammering out a new NAFTA deal, and the new Italian government’s budget negotiations. Central banker banter in Japan and actions in Turkey and the US caught the attention of investors throughout September as well.

Before the trading roundup, we’d like to share with you some interesting readings which caught the attention of our research group. They include:

  • A Critical Review of Recurrent Neural Networks for Sequence Learning, by Zachary C. Lipton, May 29, 2015 
  • “Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly,” by Malcolm Baker, Brenda Bradley, and Jeffrey Wurgler, Financial Analyst Journal, Vol 67, Number 1
  • “Wiggins: Detecting Valuable Information in Dynamic Networks Using Limited Resources,” by Ahmad Mahmoody, Matteo Riondato, Eli Upfal

Asia-Pacific (APAC):    +3.41% (gross)

After processing the tragic news of one of the worst typhoons to hit Japan in 25 years, the SIMEX and Osaka Nikkei indices shot straight up (see SGX Nikkei 225 chart below). The confirmation of Japan’s Central Bank that it had no plans to raise rates provided some of the momentum, as a weaker yen would help Japanese exports. “Palladium Rally Leads Sudden Rebound in Metals,” a short Wall Street Journal (WSJ) article by Amrith Ramkumar published on September 24, 2018, explained the persistence of the bullish run in the palladium market over the past 7 months and also shed a bit of light on why this small metal market may have provided support for Japanese and Chinese equity rallies this month. Palladium is used heavily in the auto industry and as the article goes on to say:

Investors look at industrial metals-widely used in manufacturing and construction-broadly to gauge growth world-wide. A months-long price slide in these markets had eroded investor confidence, pushing money managers int US assets throughout the year.

Yet recently, some analysts appear much more confident that a full-blown trade war and slowdown in China won’t materialize. Japan’s Nikkei Stock Average just had its best two-week stretch since July 2016, and the Shanghai Composite logged its best week in 20 months.

EC’s long positioning in Japan (and to a lesser extent China) was generously rewarded as the trajectory of September’s move illustrated in the SGX Nikkei 225 chart doesn’t get any rosier for trend followers. Trading on the Topix, Osaka Nikkei and Simex Nikkei exchanges were most impactful. The only market which siphoned some of the profitability was India’s Nifty Fifty Index (NFI). After a strong rally in the NFI over the summer, long positioning was hampered by a turnback in the market due, in part, to rising oil prices and new concerns related to the soundness of some non-bank lending companies. As Bloomberg reported (in a September 25 article by Siddhartha Singh, Anurag Joshi, Saloni Shukla and Aashika Suresh, “Defaulting Shadow Lender Faces India Insolvency Filing”):

Defaults by the IL&FS group, a systemically important non-bank lender, have rattled India’s investors this month with anxiety levels in the equity market rising to a seven-month high and companies finding it harder to close bond sales.

Europe (EU):    -0.97% (gross)

Europe was weighed down by impending BREXIT deadlines, but an added focus this month was the new Italian government’s budget discussion leanings which are not exactly rooted in fiscal conservatism. According to a September 28 WSJ article, Italy is the eurozone’s biggest government borrower, but the bigger story behind these discussions is outlined (by Emese Bartha and Giovanni Legorano, “Italian Assets Dive After Government’s Budget Plan”) below:

…concerns over Italy have deep roots. In May, fears that the country could leave the eurozone rattled markets around the world… Italy has been a key factor in keeping global investors out of Europe since. “They look at Europe, and frankly they feel to some extent it’s becoming uninvestable; the uncertainty, the volatility, the fact that the economy is much weaker than in the US,” said M&G’s (Investments) Mr. (Stefan) Isaacs.

Many EU markets took rollicking paths only to end up in just about the same place they started the month as shown in the Euro STOXX 50 and FTSE Index charts below. The profit taking in Italian MIB-30 Index trading was easily outpaced by setbacks in Euro STOXX 50, the UK’s FTSE and French CAC 40 Indexes which dragged performance into negative territory. Flat results were garnered in German DAX and Amsterdam Exchange trading.

North America NA:     -0.43% (gross)

Both the NASDAQ and Russell 2000 dragged on what was otherwise flat trading in North America. The trendless price movements of the E-Mini NASDAQ 100 and Mini Russell 2000 Indices (illustrated in charts below) proved challenging to navigate. The Russell 2000 losses cut against the grain of what had been occurring throughout the year with mid and smaller cap US stocks. In an interesting, September 16 WSJ article, “It’s Not All Tech. Small Stocks Are Powering the Market Higher,” the edge US equity markets have held this year over other global equity markets cannot be solely attributed to the FANG effect (FANG=Facebook, Amazon, Netflix, and Google), as detailed by Corrie Driebusch:

Signs of stock market breadth are everywhere investors and analysts say: Smaller-company stocks have climbed more than their larger counterparts this year. Among the quiet winners in the current market are midsize companies. When divided into five groups based on market value, the second and third quintiles of the Russell 1000 index are outperforming the top quintile that houses the biggest stocks, according to data compiled by Strategas Securities LLC. …Indeed, without the 10 biggest contributors – which includes Amazon, up 68% – the S&P 500 would be trading higher. The equal-weighted index, which gives the same weight to both the smallest and largest companies in the index, reached a record in late August – the same day as its more closely followed counterpart.

 

An end-of-month Federal Reserve rate hike was greeted favorably with US stocks closing higher on the day of the announcement; however, it may have also provided an impetus for investors to reduce some of their equity exposure. This, coupled with published reports of a new security flaw at Facebook in late September, also contributed to month-end declines.

Read More
2018-08-31
/
Categories: Commentaries
/
Comments Closed

Polaris

The Polaris program recorded a net return of +2.66% for the month of August. Returns were positive in 3 of the 4 sectors (Commodities, Equities, Currencies, Interest Rates) with the Commodities sector leading the way. Opening the month net short agricultural products and metals, and long energies, US dollar and equities, the Program also was positioned short US, but long UK, European and Japanese interest rates markets. The medium- to long-term systems garnered the bulk of the profits. Although slightly down for the month, short-term breakout and mean-reversion models served as a valuable diversifier to Polaris’ trend-following lean.

The trade war fallout dominated economic headlines and claimed several casualties in its wake. Most metals markets were down (yet again), some quite significantly. The Turkish lira really took it on the chin, but its fall also created repercussions in other markets, including emerging market equities and agricultural commodities. Contributing to the lira freefall were Turkish accusations that the US used an imprisoned American pastor as a bargaining chip in stalled trade negotiations. In frustration, President Trump threatened stiff levies on Turkish steel and aluminum imports. More to the point, it was Turkey’s massively-leveraged corporate sector, in combination with the weakened lira, that concerned traders and led to the “contagion” sell-off elsewhere. Meanwhile, US equities rallied as did most markets in the energy complex.

With all that was going on in August, you would be right to think there would be little time for much else here at RCM. However, we thought it might be interesting to share certain articles or books that recently have captured our research team’s attention. Here is this month’s sampling:

  • “The Statistical Consequences of Fat Tails” by Nassim Taleb, The Technical Incerto, VOL 1
  • Advances in Financial Machine Learning by Marcos Lopez de Prado<
  • “Multiple Imputation in Principal Component Analysis” by Julie Josse, Jerome Pages and Francois Husson, Advances in Data Analysis and Classification, October 2011, Volume 5, Issue 3, pp 231-246

We’d like to close by relating some great news which we received from BarclayHedge. We are very pleased to report that our Rotella Polaris’ performance was ranked top 10 in BarclayHedge’s “Diversified Traders Managing More Than $10MM” category for July 2018.

Commodities: +1.41 (gross)

The trade war blues throttled most metals markets. Silver prices dropped -7.2% in August and Polaris’ positioning was on the right side of that trade. While Gold was down (-2.2%) – the 5th month in a row matching the longest run of down months since 2013 – there was less opportunity for profit here with a modest loss registered. What was somewhat different this month was a very strong showing by the Agricultural subsector. Most of the markets in this subsector (24 traded this month) provided modest gains but Coffee, Rubber and Corn trading paid handsomely. Polaris’ short positioning in these markets was aided by the (aforementioned) Turkish lira “contagion” effect which had traders exiting emerging market commodity (and currency) markets for safer assets. Energy trading yielded positive returns in all markets except for Natural Gas with Gas-Oil providing the biggest gains. A decline in (US) domestic oil inventories and US sanctions on Iran caused overall supply concerns fueling the upward trajectory of Crude Oil and energy prices overall throughout August.

Equities: +0.87% (gross)

It was a pretty rocky ride for equity markets to start the month, but the program made a nice recovery in 2 of the 3 (Asia-Pacific (APAC), Europe (EU) and North America (NA)) subsectors with all but EU delivering negative returns. Some upside was provided by US hammering out a new NAFTA agreement with Mexico, although a new agreement with Canada remains elusive. As the Wall Street Journal (WSJ) noted in late August, dovish comments during the annual US Federal Reserve meeting in Jackson Hole boosted US equities and led to new record highs in the S&P 500, Russell 2000 and NASDAQ Composite. Another WSJ article by Steven Russolillo & Mike Bird (August 22, 2018), “As US Bull Market Powers Ahead, Rest of World is Left Behind,” seeks to explain why US equities have continued to lead all other global equity markets. It cites that while the US was the first hit by the 2008 global crisis, it was also the first region to make its way out of the morass. Much credit is also due to US economic dynamism from companies like Amazon and Apple which continue to lead the way in terms of technological innovation. Meanwhile, Mr. Russolillo and Mr. Bird explain, Europe is still burdened by and has been slow to recover from the sovereign debt crisis and, in Asia, Chinese equities have been hit by trade war concerns. APAC trading was up +0.17%(gross), EU was down -0.72%(gross) and NA returned +1.43% (gross).

Currencies: +0.95% (gross)

A strong US dollar showing in the first half of August was certainly bolstered by the Turkish lira’s precipitous decline which, as mentioned above, spread to other emerging markets currencies. As can be observed in the ICE Dollar Index price chart below, the demand for the dollar slowed in the latter half of the month but the dollar still closed out the month higher. Besides the lira trade, strong performance was also obtained with US Dollar cross trading versus APAC currencies, the ruble and Swedish krona. The Swedish krona fall was related to upcoming September elections in Sweden which threaten the status quo.

Interest Rates: -0.55% (gross)

Trading in this sector mainly was stymied by modest losses sustained in several of the US short-term interest rate instruments coupled with a moderate setback in the program’s Japanese government bond trade. Robust gains courtesy of long positioning in European medium- and long-term bond holdings helped to cushion the blow.

Read More
2018-08-31
/
Categories: Commentaries
/
Comments Closed

Eta Carinae

The Rotella Eta Carinae program returned +2.02% (net) for the month of August. Two of the program’s three (Asia-Pacific (APAC), Europe (EU) and North America (NA)) trading regions registered positive results.

Regarding system performance, the short-term breakout models had top overall results and generated the highest returns in APAC trading; however, the same model bucket was clipped by trading in the EU. Intermediate-to-long term models performed best in NA while short-term mean reversion had relatively equal, positive results in all three regions. All totaled, the performance generated from the short-term vs. long-term models was essentially equivalent. Our in-house Signal-to-Noise (SNR) monitoring program showed a significant rise in NA from which our models benefited and captured very well. There was more of a sideways movement in the APAC SNR which helps to explain the strong performance garnered in that region by the short-term model bucket.

From a macro news standpoint, the Turkish lira freefall had ramifications for equities and made for an interesting month of trading. While for the most part, the more established economies’ equity indices benefited at the expense of most emerging markets, there was one major exception which will be discussed below. The lira drop could partially be attributed to lack of progress in any kind of new trade deal with the US, but it also created a self-perpetuating downward spiral. The initial sell-off raised concerns that Turkey’s massively-leveraged corporate sector would be unable to repay the foreign loans it owes given the weakened lira. This situation also created “contagion concerns” which, coupled with ongoing trade tensions between the US and China, had traders abandoning most emerging market equities and commodity holdings and turning instead to seek opportunities in the US and some parts of Asia.

APAC: +2.25% (gross)

APAC was Eta Carinae’s best performing subsector with significant contributions from Japan’s bullish equity run, but the best trade this month was notched courtesy of India’s SGX CNX NIFTY (aka “NIFTY 50”) which defied what was a general emerging market equity slide. An interesting contrast has emerged between the two emerging market giants. While Chinese equities (see FTSE China A50 chart) have languished throughout 2018, Indian equity markets have had a strong bull run not only this month but the entire year. As was the case with US equities, various Indian composite indices reached new all-time highs in August. According to a July article in India’s Business Standard titled “Rising Inflation Among Key Risks to Indian Equity Market: Morgan Stanley” (https://www.business-standard.com/article/markets/rising-inflation-among-key-risks-to-indian-equity-market-morgan-stanley-118071600366_1.html), Morgan Stanley’s assessment of Indian equity performance is as follows:

Indian stocks are jostling weak emerging markets, rising rates, higher oil prices, an election year and relatively rich mid-cap valuations. The large-cap index has support from an improving growth cycle, strong macro stability and local appetite for equities,” the report says.

On the flip side, the report highlights six factors – Strong macro stability evident in a positive balance of payments (BoP) and backed by a Central Bank that is committed to keeping real rates positive; a bullish steepening of yield curve; a low and falling beta, which augurs well in a weak global equity market environment; India’s growth that is likely to accelerate relative to emerging markets (EM); strong domestic flows and a weaker foreign portfolio (FPI) positioning – that are currently working in favour of Indian equities.

Even with an Indian Central Bank rate hike to start August, it was smooth sailing for the Nifty 50 as shown in the chart immediately below.

EU: -1.82%(gross)

European equities ended August just about where they started 2018. After a great spring rally, it’s been extremely choppy (trader-speak for extremely challenging) trading conditions. A recent Wall Street Journal article (published on August 22nd by Steven Russolillo & Mike Bird – “As US Bull Market Powers Ahead, Rest of World is Left Behind”) attributes Europe’s problems to the burdens associated with its slowness in recovering from the sovereign debt crisis. While the program did attain some positive contributions in certain European equity markets such as the STOXX 50 and IBEX (Spanish equities), these results were overwhelmed by S&P MIB 40 (Italian equity index) and the Amsterdam Exchange Index trading setbacks.


<

NA: +1.74%(gross)

It was a rough start to August in NA, but after that first few days equity markets took off. The S&P 500, NASDAQ Composite and the Russell 2000 indices hit new all-time highs intra-month. For Eta Carinae, trading in the E-Mini S&P MIDCAP, NASDAQ and E-Mini Russell 2000 index futures led the way. The Wall Street Journal article by Mr. Russolillo and Mr. Bird attributes US equity outperformance versus other global markets as due in part to economic dynamism by entrepreneurial innovation but also to growth from leading established companies such as Amazon and Apple. Also, while the 2008 crisis hit the US first, the US was also the fastest to dig its way out of the depths of the crash.

Read More
2018-07-30
/
Categories: Commentaries
/
Comments Closed

Polaris

Somewhat calming news amid red-hot trade tensions provided the impetus for a strong bull run in equity markets – particularly those of Asia-Pacific and the US – and this rally was the dominating contributor for Polaris’ strong showing in July. The program, long global equity markets, notched a +2.45% net return on the month. The other impactful trading results were in the commodities and currency sectors. Increasing crude oil supply ended June’s energy price rally, while the signaling of a lean toward a tightening in monetary policy by the central banks of Japan and Europe impacted gold and USD price moves. In addition to its long positioning in equities, Polaris was also long energies, net short metals, long the US dollar and short US / long European bonds in all time frames. Meanwhile, the various model methodologies employed by the program also had very robust outings this month with short-term breakout, mean reversion and trend-following systems posting positive results.

Commodities:    -0.43% Gross

Energy trading tends to be the most influential component of the P&L in this sector. Note from the NYMEX Crude Oil price chart below that the program’s long positioning is reflective of Crude Oil’s price rise in the second half of June, only to have prices whipsaw in July with Crude Oil experiencing its biggest monthly drop (7.3%) since July 2016. The sell-off was a response to some of the largest producers including Saudi Arabia and Russia increasing supply levels and, correspondingly, output in the US remaining at record levels. Short-term breakout systems helped reduce some of the damage from the selloff as did short-term mean reversion later in the month. The dip in energy trading was also somewhat buffered by short positioning in metals trading (+34 bps gross). The modest easing of trade tensions and monetary tightening polices dragged gold prices down. Agricultural trading ended flat on the month.

Currencies:    -0.51% Gross

With the US Federal Reserve already unabashedly in the throes of tightening and Japan and the EU hinting they too will follow soon, the situation made for choppy conditions as illustrated by the price movements in the ICE Dollar Index price chart below. The short-term mean reversion models helped to shield some of the losses from the long positioning, but the dearth of opportunities throughout the month kept results in the red.

Equities:     +3.35% Gross

Asia-Pacific (APAC) equity trading was a major contributor to the P&L returning 1.18% (gross) on the month. Even with the US adding $200 billion (USD) in new tariffs against China mid-month, Japanese equities (per the SIMEX Nikkei price chart shown below) generally led the way in the region staging a strong rally the first half of the month.

The European (EU) equities returned 0.88% (gross) for the month. President Trump’s discussions with European Commission president Jean-Claude Juncker whereby both agreed to lower or altogether scrap non-auto industrial goods tariffs and re-scrutinize WTO trade policies for unfair practices calmed the markets and gave it an upside boost.

North American (NA) equity trading was the largest contributor to the P&L, returning 1.29% (gross) for the month. The US had another round of great economic reports showing a Q2 GDP growth rate of 4.1% – the strongest since 2014 – and corporate profits (well, Facebook being the exception proving the rule) up 24.6% year on year. So that investors wouldn’t get completely comfortable with the “risk-off” trade while sipping pina coladas next to the pool, Facebook took a 20% nosedive in late July after its investor call revealed a decreased growth outlook.

Interest Rates:         0.0% (gross)

The return is indicative of a completely uneventful trading month (performance-wise) with modest losses of 3 bps and 8 bps respectively in medium- and long-term instruments neutralized by an 11 bps gain in short-term bond trades. The EUREX Euro-bond price chart is reflective of the constrained price movements.

Read More
2018-07-30
/
Categories: Commentaries
/
Comments Closed

Eta Carinae

Somewhat calming news in the midst of red-hot trade tensions provided the impetus for a strong bull run in equity markets – particularly those of Asia-Pacific and the US – and this rally was the dominating contributor for Eta Carinae’s (EC’s) strong showing in July.  The program held long positioning across the global equity markets and notched a +2.26% net return on the month. By the 2nd half of July, our Signal-to-Noise indicators for each equity subregion traded (Asia-Pacific, Europe and North America) were on the descent; reflective of choppier conditions and, perhaps, foreshadowing some bouncier moves in August.

ASIA-PACIFIC (APAC)

EC’s APAC trading was the biggest contributor to the P&L returning 2.92% (gross) on the month.  Even with the US adding $200 Billion (USD) in new tariffs against China mid-month, Japanese equities (per the SIMEX Nikkei price chart shown below) generally led the way in the region, staging a strong rally during the first half of the month.  

EUROPE (EU)

Interestingly, strong performance was garnered in spite of EU trading which was down -1.20% (gross).  While the calming trade war news was due primarily to President Trump’s discussions with European Commission President, Jean-Claude Juncker, where both agreed to lower or scrap tariffs on non-auto industrial goods and re-scrutinize WTO trade policies for unfair practices, Europe’s response (compare Euro STOXX 50 Index vs SIMEX Nikkei vs E-Mini S&P price charts) was a much more skittish bull run. Ultimately, EU equities did end the month higher than June’s close, but the ascent was interspersed with relatively sharp reversals throughout the month, possibly reflective of concerns surrounding the European Central Bank’s agenda for a tightening in monetary policy. 

NORTH AMERICA (NA)

Meanwhile, the US had another round of great economic reports showing a Q2 GDP growth rate of 4.1% – the strongest since 2014 – and corporate profits (well, Facebook being the exception proving the rule) up 24.6% year on year.  So that investors wouldn’t get completely comfortable with the “risk-off” trade while sipping pina coladas next to the pool, Facebook took a 20% nosedive in late July after its investor call revealed a decreased growth outlook.  NA equity trading gained 0.72% (gross).

Read More
2018-06-30
/
Categories: Commentaries
/
Comments Closed

Polaris

North American equity markets exited their May melancholia with a bang in early June thanks to a robust US unemployment report. A 3.8% unemployment level had not been registered since the early 2000’s and, even better, all industry sectors experienced growth. Such heady numbers also resulted in a US bond market price sell-off as the news did nothing to discourage the Fed’s rate hike schedule. By midmonth, the giddiness had subsided as markets were heavily influenced by trade protectionist rhetoric hampering our positioning in the Copper, Gold, Equity and Interest Rate markets. Another market mover was the highly anticipated Vienna gathering of OPEC. There was strong opposition by some of its members heading into the meeting in terms of yielding to demands to increase production, but when all was said and done the outcome was to increase supply. Or was it? The resulting market reaction would have been puzzling with oil prices spiking sharply higher the remainder of the month, but for the fact that the production announcement was filled with ambiguity as to which country(ies) would be increasing production, as well as with the OPEC ministers’ public pronouncements of concern about potential shortages closer to year end.

The Polaris program was down 70 bps (-0.70% net) in June. In terms of the model basket performance, long-term trend models provided the best results, the break-out systems broke even but what really was impactful was the poor performance of the short-term mean reversion strategies which are supposed to buffer Polaris’ overall trend-following lean when there is a trend reversal. The reason these systems didn’t help this month was that many markets had one strong trend the first half and another equal but opposite robust trend in the second half of the month. The signal to noise ratios (SNRs) were falling in the Currency and Equity sectors; rising and then falling in the Interest Rate sector and rising in the Commodity sector.

Commodities: -0.80% (gross)

As mentioned in the introduction, Copper and Gold trading were the main detractors to performance. Polaris held long positions in both markets when trade war concerns between the US and China took over the headlines post US unemployment news heavily impacting bullish trends in both markets. Gold prices experienced a precipitous one-day drop followed by a steady decline whereas Copper NYMEX prices simply kept dropping, from a high of approximately $3.31 in early June to the mid $2.80 range by month-end. What was all the more frustrating was that the program reduced its long oil positioning due to the choppy conditions and moderate sell-off in the first half of the month and was unable to capitalize when oil prices did spike in the latter half of June. Although SNR did trend higher throughout June which typically bodes well for performance, it was not the case this month.


Currencies: +0.31% (gross)

In spite of the yoyoing moves in US Dollar (USD), the program’s short positioning managed to notch positive results. The great jobs report caused a dollar rally early on, but here again, trade war concerns were the prime factor influencing the dollar’s mainly weakening relationship to other currencies after mid-month.

Equities: +0.18% (gross)

The Equity charts of North America (NA), Europe (EU) and Asia-Pacific (APAC) all had very similar trajectories – rallying the first half of the month and selling off thereafter and each region’s final P&L was determined by how much profit we could garner from the first half rally. NA had garnered the most profit (+1.30% gross) before the drop and concluded June still up a respectable +0.57% (gross). EU had less upside the first half of the month and a bigger drop from the highs returning -0.45% (gross). APAC ended the month essentially flat.



Interest Rates: -0.39% (gross)

The Interest Rate markets had inverse trajectories to Equity markets in that a first half sell off (courtesy of strong jobs data) was followed by a second half rally (flight to quality over trade war rhetoric). What was particularly hard hit was the short positioning in the intermediate-term Interest Rate instruments which were responsible for essentially all of the losses.


Read More
2018-06-30
/
Categories: Commentaries
/
Comments Closed

Eta Carinae

Bursting out of the May doldrums, equity markets went on a manic tear and hit a high note at mid-month, bolstered by excellent economic results out of the United States. After mid-month, the positive vibes were displaced when the trade war rhetoric turned to some actionable reality. The US imposed steel and aluminum tariffs on China as well as traditional western allies. Equities voiced displeasure by an immediate reversal of trend and remained in various strident degrees of freefall mode for the rest of the month. On these occasions, defensive stock sectors like Utilities and REITs outperform industrials and financials; however, the program trades the futures contracts on overall market indices and not specific stocks, so the program employs other defensive strategies in an effort to preserve some of the gains previously garnered.

Eta Carinae allocates an equally provisioned “risk budget” to the equity markets of North America (NA), Europe (EU) and Asia-Pacific (APAC). Eta Carinae held long positioning in all geographic regions heading into June. The program’s trading models include mean-reversion, break-out and long-term trend following methodology. For this month, mean reversion models provided positive contributions; break-out systems were profitable the first week, neutral in the middle weeks and closed out the last week of the month returning some of the hard-earned profits from Week One; meanwhile, trend following models, as one might predict, did well in the first half only to give it all back during the reversal. The program did net a +0.57% return for June.

North America: +0.40% (Gross)

An incredibly robust jobs report showing unemployment at its lowest level (3.8%) in more than a decade injected optimism and pushed the trade war concerns out of the headlines…albeit until about the 15th of June. The Federal Reserve had good reason to feel self-satisfied. It finally achieved its (6-year!) mission of a 2% inflation target, plus all this great news did nothing to alter plans for two additional rate hikes in 2018. Of course, once the tariffs were announced, equities’ northern ascent made a sharp right turn southward closing out at-to levels slightly below where it started the month as shown in the E Mini S&P 500 Index chart.

Europe: -0.61% (Gross)

While the European Union’s economic picture was not quite rosy enough to consider rate hikes anytime soon (target is summer 2019), conditions were “well enough” for the European Central Bank to continue with its plans to wind down the asset purchase program. The Euro STOXX 50 Index illustrates that the sell off in the latter half of the month resulted in the market hitting its lowest levels since about mid-April. The chart also illustrates the tougher trading conditions/opportunities in the EU with a bumpier ride up in the first half of the month coupled with a steeper drop (vs the NA and APAC examples) after mid-month.

APAC: +0.96%

Meanwhile, over in Asia, the main news was out of China where the Chinese Central Bank (Peoples Bank of China) assumed a dovish stance in response to a strengthening US dollar, the falling equity markets and preparation for the potentially looming trade war. APAC was the program’s best performing sector, in part because the slope of the downward move as illustrated by the SGX Nikkei 225 chart (versus similar moves in NA and EU) allowed some of Eta Carinae’s trend reversal defense systems to more effectively trigger, thereby retaining some of the gains from the first half month of trading.

Read More