Our Major Markets portfolio consists of 180 trend following strategies (long, medium and short cycle trends) in 15 of the most important markets for global investors. Daily TrendCompass reports convey the directional exposure and trading signals for all these strategies. Here we’ll look at the performance of these signals from the start of 2020 through Friday, 19 March 2021 (this is not a backtest simulation). To make the results meaningful and comparable, they are based on an equal risk weighting for each market. For the whole portfolio, the results were as follows:

Thanks to its broad diversification, the Major Markets portfolio was significantly less volatile than the S&P 500. Its biggest draw-down was 14.66% vs. 34.4% for the S&P500. It is precisely the March/April 2020 market jolt which best reflects the advantages of a well-diversified set of high quality trend following strategies: rather than sustaining large losses during that time, we experienced only a limited decline followed by a quick recovery. In a real bear market, we would have seen continued strong positive performance!

By “real bear market,” I mean the kind that followed the bursting of the 1980s Japanese or 1920s American stocks bubbles: losses exceeding 80% and the recoveries spanning 3 decades or longer (the Nikkei is still 30% below 1989 peaks). The following table compares some risk/reward attributes of the Major Markets portfolio and the S&P500 over the same time period:

The charts that follow break down this performance and show it visually per market and per strategy:

Part 1: CURRENCY PAIRS

March/April 2020 events were very adverse to I-System strategies. They partly recovered their losses through H2 2020.
Q1 2020 jolt set the strategies back very significantly, but performance began to recover for the rest of the year as Yen gradually regained. This year’s reversal again led to another, smaller draw-down.
Here again we had negative but explainable results: until Q4 2020, the price trajectory had several trend reversals. As the trend direction emerges in Q4 2020, the performance begins to recover.

Part 2: TREASURY FUTURES

US Treasury futures provided an almost ideal environment for trend following and I-System performance has been superb here, both through the bull market and the current bear market.
US long bond price trajectory was even more favorable to trend following strategies. However, because the 30-year Bond’s short-term price fluctuations tend to be more volatile I used a smaller position size, since risk weighting is based on short-term price volatility. As a result, we had better long-term performance on the 10-year T-Note futures.
The Bund was one of the best markets for trend followers from 2016 through 2019. But after the 2019 price peak, the long and volatile sideways market caused a continued losing streak. Unfortunately, this is a fact of life for trend followers.

Part 3: EQUITY INDICES

During the Feb-April crash, the I-System strategies reversed from long to short, recovering some losses through the market crash. But the subsequent reversal added to losses. A recovery began only as the market reaffirmed the bullish trend in H2 2020.
DAX has also been very difficult to trade in 2020. While we saw strong gains during the Feb-Apr crash, subsequent reversal and wobbly recovery whipsawed our strategies.
FTSE has been so bad over the last two years that it proved less harmful to trend following strategies than the DAX. Absence of a trend before the March 2020 crash meant that the strategies went short sooner and the weakness of the subsequent reversal meant they gave back less of those gains.

Part 4: ENERGY

Last 15 months saw strong trends in energy markets, both down and up – a very favorable environment for trend following.
Like Brent, WTI strategies have done very well. The main difference between them is that some of the WTI strategies use more restrictive stop-loss and profit-taking signals. As a result, a few of them sat out parts of the March/April 2020 collapse and the Oct. 2020-March 2021 price rally. This is annoying: a trend follower prefers to lose when caught on the wrong side of a market move than to sit out a major trend without a position. The simple principle is that profits are a reward for risk taking.

Part 5: METALS

All in all, Gold strategies had a satisfactory performance in spite of the unpleasant bump this time last year (March 2020). In 2021, profiting from the price decline reflects the benefit of trading without an opinion or bias – trends provide profit opportunities on the long and on the short side. In some circumstances it is better not to have opinions.
Overall, I-System performance on Silver has been superb, generating substantial gains both on the long and on the short side. A well formulated set of strategies can withstand the drag of three outliers among them.
Copper quickly went from one of our worst markets to the best. At the start of 2020, most of our Copper strategies were deep in their draw-downs. But as good trends returned, they navigated the last 12 months’ events very well.

Part 6: THE WHOLE PORTFOLIO

Keeping approximately the same risk exposure in all of the above 15 markets would have generated the following performance (after all the commissions on trades and roll-overs paid):

Average performance for each market’s set of 12 strategies and their cumulative performance on the equal risk-weighted basis.

On position sizing and its effect on performance in individual markets: risk weighting is based on short-term price fluctuations: the more volatile the markets we trade, the smaller our position sizes. For this reason, the U.S. 10-year T-Note (TY) turned out to be our best performer: since it is less volatile than the 30-year Bond, TY position was a bit larger. But as longer-term price changes were similar in both markets, TY generated greater profits. The issue is that we can easily measure the volatility of short-term price fluctuations, but we can’t predict large-scale price events.

Part 7: CONCLUDING REMARKS

In the above simulation, Major Markets portfolio was significantly less volatile than the S&P 500. More importantly, its biggest draw-down was 14.66% vs. 34.4% for the S&P500. It is precisely the March/April market jolt which best reflects the merit of a well-diversified set of trend following strategies. Rather than sustaining large losses during that time, we experienced only limited decline followed by a quick recovery. In a real bear market, we would have seen continued strong positive performance! Here’s what I mean by “real bear markets”:

I-System’s ability to implement thousands of intelligent trading strategies in over 200 financial and commodity markets with no dilution of quality or focus is the reason I believe I-System truly is the very best trend following model ever built. As we head into the new commodity super-cycle and stocks stand at the peak of the ‘everything bubble’ investors can benefit from I-System strategies through our TrendCompass reports.

For investors accustomed to the riveting stories about Bitcoin, Tesla and similar hockey-stick assets, systematic trend following may not seem as exciting. However, trend following is a serious long-term strategy for serious investors. It takes the guesswork out of investing with quality decision support that allows investors to navigate the uncertain future profitably, with confidence and piece of mind.

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TrendCompass delivers consistent, dependable and effective decision support daily, based on I-System trend following strategies covering over 200 key financial and commodities markets with no dilution in quality or focus, all at a fraction of the cost of in-house market analytics and in line with moderately priced investment newsletters!

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