mta 2015 october london final

TREND FOLLOWING

Problems (and possible solutions)

for application to equities

October 2015 – London

Riccardo Ronco +44 20 7233 3245 [email protected]

Riccardo Ronco +44 20 7233 3245 [email protected] 2

Risk Warning

CMC Markets is an execution only service provider, offering Spread bets and Contracts for Difference. When trading these products you do not own or have any interest in the underlying assets. Spread bets and Contracts for Difference ("CFDs") are leveraged products and carry a high level of risk to your capital as prices may move rapidly against you. Losses can exceed your deposits and you may be required to make further payments. Binary products (including Countdowns) carry a level of risk to your capital as you could lose all of your investment. Invest only what you can afford to lose. These products may not be suitable for all clients therefore ensure you understand the risks and seek independent advice. CMC Markets UK plc and CMC Spreadbet plc are authorised and regulated by the Financial Conduct Authority in the United Kingdom in relation to the provision of CFDs and Spreadbetting. In relation to binary products (including Countdowns) CMC Markets is licensed and regulated by the Gambling Commission, reference number 42013. CMC Markets supports responsible gambling, for information and advice please visit www.gambleaware.co.uk. Market Technicians Association (“MTA”) , Aviate Global and any representatives thereof are not employees, agents or representatives of CMC Markets. As such, they are not in a position to answer any questions that relate to CMC Markets, its products or its Platforms. Any discussions held, views and opinions expressed and materials provided during this session are the views, opinions and materials of Riccardo Ronco alone and do not represent the views or opinions of CMC Markets. All information and materials provided are not independent investment research and are provided for general information purposes only and does not take into account your personal circumstances or objectives. These sessions or any materials provided are not and shall not be construed as financial promotion, nor are they (or should be construed to be) financial, investment or other advice upon which reliance should be placed. Nothing in any material provided or in any views and opinions expressed constitutes a recommendation by CMC Markets that any particular investment or investment strategy is suitable for any specific person. CMC Markets does not endorse or offer opinion on the trading strategies used by Riccardo Ronco. The trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

Riccardo Ronco, CFTe Biography


Riccardo Ronco is the head of technical analysis at Aviate Global in London. Mr. Ronco follows large- and mid-cap European and U.S. equities, paying attention to domestic and foreign equity indices, currencies, commodities, and interest rates. As a medium-term trend follower, his approach is strongly quantitative in nature; particular attention, however, is devoted to identifying reversal patterns characterized by excessive consensus among investors. Mr. Ronco brings more than 15 years of experience in trading, quantitative analysis, and teaching technical analysis in the United Kingdom and Ialy. Prior to joining Aviate Global in April 2010, Mr. Ronco worked for Credit Agricole Indosuez, Banca Intesa Group, and Banca AntonVeneta (MontePaschi Group) and FBR Capital Markets. He is a frequent guest on CNBC Europe and other European media outlets. A member of the Society of Technical Analysts (STA) from 2000 to 2015 and the Market Technicians Association (MTA), Mr. Ronco was a speaker at the International Federation of Technical Analysts (IFTA) 1998 conference in Rome, in Beijing (2011) and in New York for the MTA 2015 Symposium. His work is mentioned in the book Capital Market Revolution: The Future of Markets in an Online World by Patrick Young. Mr. Ronco received his degree (with honors) in economics from the University of Turin. He currently holds Chartered Market Technician (CMT) Level 1 and 2 diplomas.

Awards

Riccardo Ronco +44 20 7233 3245 [email protected]

Behavioral Basis for Trends


Behavioral Basis for Trends


“Demystifying Managed Futures”, Hurst Ooi Pedersen

Fundamental Value

Trend starts (anchoring + under-reaction)

Trend continues (herding + over-reaction)

Trend ends (back to fundamentals)

People are prone to making SYSTEMATIC ERRORS in circumstances of uncertainty

From David Ricardo (1772-1823) to Ed Seykota


“The Great Metropolis”, Vol II, 1838, James Grant

Problem nr 1: FEEDBACK CHANGES


•Markets alternate phases of positive feedback with phases of negative feedback •Positive feedback: investors/traders BUY into STRENGTH and SELL into WEAKNESS

•Negative feedback: investors/traders SELL into STRENGTH and BUY into WEAKNESS

•Investors’ capital is always moving between LEADERS and LAGGARDS

•Simple RELATIVE STRENGTH is a major tool to help spotting LEADERS and LAGGARDS

•Ranking is another major tool to keep focus on these two sets of stocks

Important paper : Asness, Moskowitz and Pedersen (2008), “Value and Momentum Everywhere” Important book : Gary Edwin Anderson (2012), “The Janus Factor”

TREND + RS ---> LEADERS LAGGARDS


Things are not so simple


Ideally, as a trend follower, all you want to do is:

•...Buy BREAKOUTS in the strongest stocks in the strongest countries and

•...Sell BREAKDOWNS in the weakest stocks in the weakest countries

In REALITY, it depends on the CONTEXT, the environment

IMPORTANT QUESTION

“are we in a TREND FOLLOWING/HIGH MOMENTUM environment or in a MEAN-

REVERSION/LOW MOMENTUM environment?”

Momentum Crashes


•RANKING stocks on a 12 –month basis

•Holding for one month (long only), no transaction costs

•Creating 10 portfolios for each decile (10 best/winner – 1 worst/loser)

•60-year period 1947-2006 comparing leaders, laggards, cash and B&H

Important paper Daniel, Moskowitz (2013), “Momentum Crashes”

LEADERS vs LAGGARDS


Momentum Components, 1947-2006 Over the 60-year period from 1947:01 through 2006:12 Cumulative returns for four assets: (1) the risk-free asset; (2) the CRSP value-weighted index; (3) the bottom decile “past loser” portfolio; and (4) the top decile “past winner” portfolio. Initial capital $1 in January 1947 Source: Daniel, Moskowitz (2013), “Momentum Crashes” CRSP = Center for Research in Security Prices

Momentum Crashes


Momentum Components, 1947-2006 Result of a LONG WINNER SHORT LOSER portfolio Source: Daniel, Moskowitz (2013), “Momentum Crashes” CRSP = Center for Research in Security Prices

Momentum Crashes

14 Riccardo Ronco +44 20 7233 3245 [email protected]

momentum strategy suffers its worst performance at “turning points,” following large market declines •June 1932, the market bottoms...

•in July-August 1932, the market rose by 82% but...

•... losers outperform winners by 206% (L +236%, W+30%)

•March 9, 2009, S&P 500 bottoms @ 666.79...

•In March-May 2009, the market has a violent rally of 40%

•...losers outperform winners by 149% (L +156%, W +6.5%)

Momentum Crashes: 1930s


Result of a LONG WINNER SHORT LOSER portfolio Source: Daniel, Moskowitz (2013), “Momentum Crashes” CRSP = Center for Research in Security Prices

Momentum Crashes: March 2009


Comparing Winners / Losers / Stock Market Here we are using the Dow Jones U.S. Thematic Indices (Attention: RESULTS are DIFFERENT FROM CRSP data) https://www.djindexes.com/mdsidx/downloads/meth_info/Dow_Jones_US_Thematic_Neutral_Indices_Methodology.pdf

https://www.djindexes.com/mdsidx/downloads/meth_info/Dow_Jones_US_Thematic_Neutral_Indices_Methodology.pdf�

Momentum Crashes: Nov 2002


Comparing Winners / Losers / Stock Market Using Dow Jones U.S. Thematic Indices (Attention: RESULTS are DIFFERENT FROM CRSP data) https://www.djindexes.com/mdsidx/downloads/meth_info/Dow_Jones_US_Thematic_Neutral_Indices_Methodology.pdf

https://www.djindexes.com/mdsidx/downloads/meth_info/Dow_Jones_US_Thematic_Neutral_Indices_Methodology.pdf�

Point of View of a Trend Follower


“Those were the lean years, 1911-1914. The market flattened out. Things drifted from bad to worse. I not only lost all I had but got into debt again. There was no money to be made.” Jesse Livermore, Reminiscences of a Stock Operator(Lefevre)

POSSIBLE SOLUTION


“In some seasons trend following is good; in others, reversing is good.

The problem is how to differentiate the two seasons in advance.”

Victor Niederhoffer, The Education of a Speculator

CALCULATE AND PLOT THE HIGH/LOW MOMENTUM RATIO

In an attempt to qualify what kind of environment we are in

•a RISING ratio indicates POSITIVE feedback (MOM beats MR): use TF

•a DECLINING ratio indicates NEGATIVE feedback (MR beats MOM): be a “contrarian”

S&P EW vs High/Low Momentum Ratio


In a bull market we can see the alternation between MOM phases (bullish ratio) and MR phases (bearish ratio) regardless of countertrend moves in the main trend



Bull markets start with “junk” rallies Bear markets start with the sale of recently bought laggards – weak hands



Bull markets alternate MR vs MOM for long periods of time Bear markets are mostly MOM (bearish) affairs with MR rallies

Alternative: MTUM (Hi Mom Long) / SPY ratio


DJ Stoxx 600: EU MOM vs SXXR (TR)


MSCI Europe Momentum Net EUR Index: MAEUMMT Index on Bloomberg DJ Stoxx 600 Total Return: SXXR Index on Bloomberg

Problem nr 2: Optimization (choice of parameters)


No commissions, no taxes, no reinvestment when in cash

10

100

1000

10000

100000

01/0

9/19

28

01/0

6/19

31

01/0

3/19

34

01/1

2/19

36

01/0

9/19

39

01/0

6/19

42

01/0

3/19

45

01/1

2/19

47

01/0

9/19

50

01/0

6/19

53

01/0

3/19

56

01/1

2/19

58

01/0

9/19

61

01/0

6/19

64

01/0

3/19

67

01/1

2/19

69

01/0

9/19

72

01/0

6/19

75

01/0

3/19

78

01/1

2/19

80

01/0

9/19

83

01/0

6/19

86

01/0

3/19

89

01/1

2/19

91

01/0

9/19

94

01/0

6/19

97

01/0

3/20

00

01/1

2/20

02

01/0

9/20

05

01/0

6/20

08

01/0

3/20

11

01/1

2/20

13

S&P 500 MA

B&H

Trade them all! (and play with weights)



From Bullish/Bearish to How MUCH Bullish...



ROBUST TF: Multi-Average + Reinvesting


No commissions, no taxes, YES reinvestment

100

1000

01/1

1/19

92

01/0

8/19

93

01/0

5/19

94

01/0

2/19

95

01/1

1/19

95

01/0

8/19

96

01/0

5/19

97

01/0

2/19

98

01/1

1/19

98

01/0

8/19

99

01/0

5/20

00

01/0

2/20

01

01/1

1/20

01

01/0

8/20

02

01/0

5/20

03

01/0

2/20

04

01/1

1/20

04

01/0

8/20

05

01/0

5/20

06

01/0

2/20

07

01/1

1/20

07

01/0

8/20

08

01/0

5/20

09

01/0

2/20

10

01/1

1/20

10

01/0

8/20

11

01/0

5/20

12

01/0

2/20

13

01/1

1/20

13

01/0

8/20

14

01/0

5/20

15

B&H

12M

9M

6M

3M

ALL

Invested in SPY if above 3, 6, 9, 12 or all averages (25% each) or in IEF (US 10-year)

Pfolio CAGR%

B&H 8.9%

12 M 12%

9 M 13.13%

6 M 12.50%

3 M 9.28%

ALL M 11.92%

Problem nr 3: Reducing Risk in Bear Markets


No commissions, no taxes, NO reinvestment when in cash

Going Global with Large Cap: 100 stocks


10 MIO USD portfolio: 0.5% commissions, no taxes, no reinv. when in cash

Running 10-month MA on FTSE 100 (long only)



10-month filter on stocks AND Index (at entry)



Bibliography

16 October 2015 Riccardo Ronco +44 20 7233 3245 [email protected] 33

Gary Edwin Anderson – The Janus Factor: Trend Follower’s Guide to Market Dialectics Andreas Clenow - Following the Trend: Diversified Managed Futures

Andreas Clenow – Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies

A. Greyserman, K. Kaminski – Trend Following with Managed Future: the search for crisis alpha

Gary Antonacci – Dual Momentum Investing

Nick Radge – Unholy Grails: A New Road to Wealth

Michael W. Covel - Trend Following: Learn to Make Millions in Up or Down Markets Curtis Faith - Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders

Mebane T. Faber - The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets

Anthony Garner - A Practical Guide to ETF Trading Systems: A Systematic Approach to Trading Exchange Traded Funds

Van K. Tharp - Trade Your Way to Financial Freedom

Edwin Lefevre – Reminiscences of a Stock Operator

Legenda


Every week, for several different countries and asset, classes a given set of technical indicators is calculated on specific Equity, Equity sector and Commodity indices. First, we calculate our proprietary momentum indicator; we then rank the industry groups from best to worst, showing the results for the last six weeks (Friday’s closing prices are used in our calculations). We use the blue color for “Overweight,” the red color for “Underweight,” and no color for “Neutral.” We prefer to find buy ideas in the top third results of our ranking model, while short ideas are better suited for those indices in the bottom third. This table provide a quick, yet effective, way to see the dynamics of relative performances in these indices, showing investors’ preferences in the medium term. From an absolute performance point of view, we need to calculate instead the weekly MACD (Moving Average Convergence/Divergence) indicator and its nine-week moving average (the “signal line”). We technically define a bullish swing as one when the MACD is above its moving average and a bearish swing as one when the MACD is below its moving average. On the “Time” column, we count the number of weeks from one swing to the next to gauge the maturity of the current move. When comparing the MACD with its moving average and with the zero line, however, we can define four phases (Up, Advancing, Down, and Terminating). The idea is to divide price oscillations into clearly identifiable phases (as inspired by the work of Ian S. Notley) and adjust our risk/reward expectations according to these indications (see column “Action”, representing the number of weeks a particular index has spent in its bullish or bearish swing phase). The bullish swing includes the Up and Advancing phases. Up: The index has bottomed (possibly after showing positive divergences) and is breaking resistance levels. Investors should have a low-risk entry point here. The weekly MACD is below the zero line but above its signal line. Size should be small at the beginning, and the investor should allow prices to prove themselves. Advancing: Prices are trending nicely higher with moderate volatility. Approaching the top, we usually see volatility picking up and weekly (daily) ranges increasing. The weekly MACD is above both the zero line and its signal line. Buying dips can be a rewarding strategy. The bearish swing includes the Down and Terminating phases. Down (Declining): The index has built a top (or a congestion phase), and the weekly MACD has crossed from above its signal line. The MACD itself is still above the zero line here, and the implication is to lighten the position and to use each short-term pullback to reduce/sell the exposure (sell on rallies). Terminating: Prices are accelerating to the downside, and the weekly MACD is now below both zero and its signal line. Sharp rallies could be confusing, but sticking to the trend is the best strategy, and investors should generally avoid buying dips here. Volatility is sharply increasing. EM: Emerging Market.

Information about technical analysis


This trading idea is based upon technical analysis, which involves the study of historical price and volume trading patterns and the potential direction of future trading based upon such information. There is no direct or implied guarantee of any particular outcome. This analysis is different from fundamental analysis and the conclusions reached may differ. Technical research does not represent a rating or coverage of any discussed issuer(s). Our daily charts for European and U.S. equities try to highlight in a quick and easy way information about the trend, the relative performance against its benchmark, price momentum and accumulation/distribution using volume. Our conviction is clearly a function of these elements and of the time frame used. To determine the trend we use the classic combination of two moving averages based on a 50 and 200 day length. The trend of the stock will move above and below these moving averages and we will look for buy (sell) ideas when price will be above (below) both of them or during mild pullbacks affecting only the 50-day moving averages. Given two or more signals on stocks in uptrend we use the relative strength versus its benchmark (usually the Eurostoxx 600 for European names and the S&P 500 for U.S. names) to discriminate which one offers the best opportunity for a given signal. Again we like stocks in uptrend with a bullish relative strength as buy candidates. Momentum (we use the classic MACD Moving Average Convergence Divergence Indicator) tells us where we are in the current phase of the trend. The MACD indicator represents the difference between two moving averages of 12 and 26 days. If this indicator is widening, it confirms the trend in prices is healthy and accelerating. A possible indication to reduce exposure in a stock that is in uptrend and outperforming is provided either by a short-term trend reversal toward the zero line of this indicator or by a negative divergence between prices and the MACD indicator. New highs in price that are not confirmed by new highs in the MACD, are leading indications that the pace of the trend is slowing down and a possible reversal is in the offing. Finally we consider volume in our work in two forms: raw volume represented by a vertical histogram (red for negative trading sessions, blue for positive ones) and the OBV indicator. Raw volume can indicate the underlying structure of buying and selling in the short-term: we like higher price on higher volume and lower prices on lower volume, indicating a positive feedback in investors’ mentality. Spikes in volume are usually associated with climaxes and a short-term reversal is usually the norm. The OBV indicator tries to help to answer the question whether the stock is under accumulation or distribution. The OBV indicator follows prices 95% of the time: we add (subtract) the volume of the day if the close is positive (or negative) to a running total. A stock that has been for 2-3 months in a tight trading range with an OBV indicator that is breaking higher (lower) provides a leading indication of accumulation (distribution) and helps the investor/trader to be prepare ahead of the breakout in prices. Aviate Global’s technical rating system has seven categories to differentiate short-, medium-, and long-term time horizons. If there is no rating listed for a stock, Aviate Global is neutral and has no opinion on the stock. Speculative Buy: A short-term buying opportunity lasting up to one month with projected upside of 10% or more. Buy: A medium-term buying opportunity lasting up to six months with projected upside of 25% or more. Strong Buy: A long-term buying opportunity lasting more than one year with return potential of 50% or more. Sell Short: A short-term selling opportunity lasting up to one month with projected downside of 10% or more. Take Profit: Immediate closing out of existing position at a profit. Sell/Reduce: Used for a stock with a deteriorating long-term technical outlook that is expected to have a very limited or negative return over the medium to long term. Stop Loss: Immediate closing out of existing position at a loss. Aviate Global’s technical ratings use specific return targets; returns are not guaranteed and are used for illustrative purposes only. Chart sources: Bloomberg and Aviate Global LLP.


Global Disclaimer

Aviate Global LLP is authorised and regulated by the Financial Conduct Authority and is a member of the London Stock Exchange. Aviate Global LLP is registered in England and Wales No. OC324323. Aviate Global (US) LLP is a broker dealer registered with the U.S. Securities and Exchange Commission, is a member of the Financial Industry Regulatory Authority (FINRA), and the Securities Investor Protection Corporation (SIPC). Aviate Global (Asia) Limited (CE no. 1950254 and BBY489) is licensed by the Securities and Futures Commission (SFC) of Hong Kong. This note is circulated to you as a client of Aviate Global LLP. Please note that the views contained within may have been disclosed earlier today to some clients via Bloomberg. If you would like to receive our earlier Bloomberg message, please contact Paul Moran on +44 20 7233 3218. Aviate Global LLP generates high conviction trading and investment ideas for its clients. 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This report does not constitute investment advice, does not constitute a personal recommendation and has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it.

mta 2015 october london final

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