When markets reprice risk, it is not fun being a trend-follower. Long equity indices were a crowded trade and few made money when the early October reversal hit the markets. Fast traders were able to exploit the move, but a bounce off the lows hurt intermediate traders. Bonds were hit with the cross-currents of flight to safety against the continued threat of growth and Fed action. Currencies were hit with this repricing and not a place of profit able trends.
Commodities were not immune to this repricing of risk. Precious metals moved higher on the safety factor but the base metals are not pricing in slower economic growth. The energy complex is actually in a greater free fall than equities and caught many by surprise.
The spike in volatility, while not as strong as February, has a major impact on trend-followers. Many now position size on volatility and target portfolio volatility. The result is that higher vol will mean smaller positions and less chance at performance recovery in the short-run. A ten percent down move followed by a 10 percent up move will generate a negative gain. This problem is compounded if higher volatility leads to smaller positions during the recovery phase.
Our sector trend analysis sees some opportunities, but the low signal to noise level suggests that at this date, return upside will be limited.