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Market Review for 2011
 

Financial blogger Jez Liberty follows the results of all of the major trend-following strategies, and many of the hedge funds that use them.

  

He recently summarized the 'State of Trend Following in 2011' in a blog post, and concluded that the year ended 'deeply in the red' for almost all the major trend-following strategies (http://www.automated-trading-system.com/
resources/trend-following-wizards-fund-performance/
).

  

Of the 12 trend-following strategies he monitors, 9 were negative in 2011, ranging from -6.2% to -46.9%, and the average of all 12 was -15.6% for the year 2011.

  

The same blogger reported that 27 high-profile trend-following hedge funds were strongly negative in 2011, with only 6 of the 27 generating positive returns for the year. The average of the 27 was -7.5% with a range of -27.9% to +6.3% (http://www.automated-trading-system.com/resources/trend-following-wizards-fund-performance/).

 

  

The point of this is that 2011 was a very tough one for trend-following strategies in general, as it has been for several of our models that incorporate their own trend following.

 

Over the years, trend-following strategies have proved themselves to be long-term winners - just as our own analysis has shown.

 

However, every once in a while they have difficult years. This is usually during periods when the Market is being driven disproportionately by external events. When this happens, trends driven by the Market's own underlying technicals don't get traction and are instead overridden by the interfering external events and circumstances.

 

That certainly describes the year 2011!

 

From the earthquake and tsunami and radiation leaks in Japan in the early part of the year, to the Congressional debt-ceiling fiasco mid-year, to the minute-by-minute Market reactions to headlines and rumors from the Eurozone's soverign debt crisis that have continued throughout the year and even to this very day ... 2011 was a year dominated by external events. Indisputably, these externals had unusually exaggerated influence.

 

Money manager and author Gary Kaltbaum (GaryK.com) enumerated the Market gyrations that occurred just in the four months between August 1 and December 2:

(begin quote from Gary Kaltbaum's 12/2 blog post - see http://garyk.com/?p=1778)

 

1. Crash into early August, then hit a low where Market rallied up 10% in six days.
2. We then dropped about 7% in 3 days.
3. We then rallied up about 9% in 7 days.
4. And then in 2 days we dropped about 8%.
5. In 2 days we rallied up 5.5%.
6. And then next 2 days we dropped 6%.
7. And the next 5 days we rallied up 7%.
8. And the next 3 days we dropped about 9%.
9. Next, we rallied up about 7%.
10. The next 4 days we dropped about 10%, culminating with the washout on Oct 4.
11. And then in 5 days we rallied up 11%.
12. Sat around. Had two big gaps into the highs of late August and then we had two big gaps down.
13. A little rally up.
14. Another big day down.
15. Within a day, a gap up. Then another big drop.
16. Went down about 9% in seven days.
17. And this week (week ending 12/2) on two days that gapped up, a total of about 640 points.
18. We finished with a rally this week (week ending 12/2) of 8% and this one was for the books. (But) You couldn't get in because they were gaps.

(End quote from Gary Kaltbaum's 12/2 blog post.)

Whew! Makes me dizzy just reading that!

With all these Market gyrations, and with the huge levels of FUD (Fear, Uncertainty, Doubt) infecting the world - particularly regarding Europe - it is easy to make the case that having been on the sidelines (as most of our models were) was actually quite prudent, given the range of potential negative outcomes!

 

But there is good news:  No time of difficulty lasts forever.  

 

Sincerely,

 

David Schlossberg

Senior Partner

 

Assured Concepts Group, Ltd.

  

 

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David Schlossberg, RFC, AIF

Larry Strzelecki, MBA, CFP

1141 East Main Street, Suite 215

East Dundee, IL 60118
 

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