May was a mixed month for many trend-followers. Some did well while others got caught on the wrong side of mid-month reversals. The month saw a mid-month equity sell-off which could have stopped-out a number of key positions in equities and bonds. This sell-off was based on political uncertainty and not macro fundamentals.

While volatility was reaching multi-year lows, there was still risk in the markets through short-term rapid changes and trend reversals. The second half of the month started to show some better trends which may be profitable in June. Nevertheless, we are concerned that the usual negative correlation between bonds and stocks does not seem to present. Both equities and bonds are trending higher. One could argue that this is a result of lower inflation expectations, but we fear that equity and bond traders have different expectations on growth. Equity optimism and bond pessimism cannot both be right.

The dollar has again started to move lower which is a continuation of the longer-term trend for year. Precious metals have moved higher with the dollar decline. There is a renewed down trend in energy prices, but many of the other commodity markets have no clear trend direction.

Right now, the financial sectors offer the best opportunities albeit muted given the lower volatility across many markets. Our largest concern is that volatility spikes may cause positions to be lost in a muted trend environment.