Over the past few trading sessions, I-System strategies have gradually reversed from long to short positions on treasury futures (long gilt, German bund, US 30-yr T-Bond), with the exception of the 10-year T-Note where our positioning remains net long. This could be a significant development if we are looking at the beginning of a major correction or a trend reversal, but it is a difficult call: we are still disconcertingly close to market peak levels. However, trend following strategies have proven quite effective at calling trend moves and reversals over the last several years.
A series of recent reports from JP Morgan, ABN Amro, Bloomberg and Nomura showed that some of their leading analysts, including Marko Kolanović and Masanari Takada, started paying closer attention to the trading activities of the CTAs.
CTA stands for Commodities Trading Advisor. But their importance here has less to do with commodities and more to do with the fact that most CTAs use systematic trend-following strategies to trade in a broad spectrum of markets, including stocks and bonds. Because all these strategies tend to be similar, when CTAs start taking (or closing) positions in some market, they often do so collectively and can trigger significant price moves.
Thus Nomura hypothesized last month that CTAs played the leading role behind the sharp 2019 moves in yields (precisely the subject of the article I posted in September). The explanation is that CTAs are more technically minded and qucker to act than other funds.
Whether the present market reversal is a watershed moment or merely a temporary correction remains to be seen. However, it is worth paying attention because the price of the US 10-year Treasury Note is deemed by many to be the most important price for the global economy, with potentially far-reaching repercussions on equity and commodities markets.
How I-System navigated the trends
Below, we revisit I-System’s superb navigation of the treasury futures prices which I first published on 6 September 2019:
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.
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:
We knew to trade as we did because we rely on intelligent trend following strategies we formulated using I-System model. I-Sysetm is a dual neural network comprising a knowledge framework in market analysis and trading. In practice, it is a reliable trends auto-pilot, capable of deploying dozens of autonomous trading strategies within that same framework of knowledge.
In treasury markets, the price fluctuations, our risk exposure and recent performance are best presented graphically:
US Treasuries have been difficult to trade as prices peaked in mid-2016 with several trend reversals and much sideways consolidations in between. Consequently, navigating the price fluctuations hasn’t been easy. However, as sustained price trends emerged from late 2017 until today (first down, then up), adhering to a set of trend folowing strategies generated strong trading gains and rose to new performance peaks. The sequence of events shown in the above chart was similar in other markets we traded and the performance of our strategies is illustrated below:
The reason I find this performance remarkable is not because it is spectacular in the absolute sense, but because it is entirely driven by a set of quantitative trading strategies. We strictly did not need to know anything about the economic conditions affecting US, British or German treasuries and interest rates, about central bank and government policies, GDP, employment, inflation, or any other factor. We simply navigated through the uncertainty through disciplined adherence to a set of well-formulated trend following strategies.
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