Market Review:
As the banking crisis deepened and panic spread throughout the American financial system the US markets rose this week - precisely as everyone would have predicted.
If you’re a buy and hold investor, stocks holding up despite such negative news is bullish. From a trend-following perspective, however, markets need to do more than just hang in there. Only rising prices are bullish.
The problem with the market is that beneath the surface of the major indexes, most stocks are actually falling.
For example, the iShares Russell 2000 Growth ETF is down 7.08% so far in March. The monthly chart, shown below, shows that this down month is taking place within the context of a 1 year trading range that has the potential to break lower to the downside:
Apparently, there’s a great new bull market and confirmed uptrend currently underway, but I’ve been studying this chart carefully and I simply cannot find it.
Trend Following Discussion:
Typically during a financial crisis the S&P 500 gets crushed, but Trend Following holds up pretty well.
In this case, however, the opposite is happening. One of the Trend Following ETFs I previously discussed - DBMF - got slammed this week and is currently in a 21% drawdown from the highs:
Although DBMF’s problems have intensified recently, the fund was flashing warning signs for a while now.
Firstly, I got stopped out of the ETF when price closed below the 20ema last September.
From there, DBMF experienced a serious shot across the bow in the form of a major gap down in November.
Following the gap down, price continued to slide lower, which caused the long-term trend to turn down.
Now that DBMF is in a long-term downtrend, should the true, hardcore Trend Following believer obey his system and sell it short? Is trend-following the trend follower still trend-following???
At the time of this writing, my multiple personalities are in debate but we expect to have a resolution to this difficult question soon.
Anyway, DBMF isn’t the only such fund getting hit. Another related ETF that trades under the ticker symbol CTA lost 11% in a single week.
Outside the world of ETFs, probably the most famous classical Trend Following firm, DUNN Capital, lost nearly 17% just in March - a month that is only half over.
Upon closer review, it appears that the bulk of the damage was done by the US 2-year yield declining by the fastest rate since Oct 1, 1982.
Now before writing DUNN Capital off, remember that the firm has survived numerous drawdowns throughout its impressive track record going back to the early 1970s:
The fact that Bill Dunn has had the discipline to follow his system for 50 years and navigate every past drawdown is not only impressive but hugely inspirational.
Gold:
While most market indexes are still stuck in a trading range, there have been some interesting moves in the realm of commodities.
Firstly, Gold had a huge week and is once again looking constructive from a monthly perspective.
Gold has been coiling for the past eleven years, building pressure that could, potentially, lead to an explosive move higher.
But to be clear, consolidations by themselves are not bullish - only rising prices are bullish from a Trend Following point of view.
And a clear indication that prices are rising is a new 52-week-high. Because 52-week-highs are not happening at this moment, I’m not long gold, although that could change quickly.
In the meantime, there are other options available to participate in Gold today.
As previously discussed, the Momentum Gap Option strategy can be used prior to price actually making a new 52-week-high.