The wait is over and the change in rate policy is here. The Federal Reserve delivered a 50-basis-point rate cut this week. We largely knew that a cut was coming. But we don’t know whether the cut will feed investor confidence in economic conditions, or feed into fear of possible recession.
It’s no surprise that diversification remains the call of the day. But if we were to reposition or redeploy cash from the sidelines, where should we look to go?
I went looking for clues among the trend followers.
Trend following is an exercise in technical analysis, systematic rules following, and signals reading that’s objective and agnostic. A trend follower leaves bias at the door, and simply follows price trends of assets wherever they may take them.
This “buy” what’s working, “short” what’s not is an approach that hardly makes for flashy risk taking. On the contrary, trend following is usually good at managing risk as position entry points are as important as the exit.
Interesting Tale of Fixed Income
Consider the Blueprint Chesapeake Multi-Asset Trend ETF (TFPN ), a go-anywhere long and short portfolio tapping into as many as 500 securities, futures, and forward contracts. Jon Robinson, CEO and co-founder of Blueprint Investment Partners, is co-portfolio manager of TFPN along with famed Turtle Trader Jerry Parker, CEO of Chesapeake Capital.
The latest portfolio update for this fund tells an interesting story about fixed income. If the trend is your friend, duration is your newest darling.
TFPN has been long credit in high yield and corporate bonds for a while. It has also owned mortgage-backed securities and municipal bonds in the past year. These are all parts of the fixed income universe that have an “equity and interest rate kicker” to help drive results, as Robinson puts it. It makes sense given that equities, too, have been riding an uptrend in that time frame.
But sovereign investment-grade bonds were a different story. The fund started shorting the category back in 2021 before it was popular to do so. As recently as mid-July, TFPN remained net short government bonds due to a long-standing downtrend that looked sticky until about two months ago.
The short end of the yield curve was the first to flip net long. That was followed by mid-duration and now long-term bonds ahead of the Fed rate cut. TFPN has been increasing its exposure to duration in recent weeks. Fixed income today is the largest net long position in the portfolio.
“From a trend-following perspective, the play right now is to be long bonds, short rates, and we’re positioned that way,” Robinson says.
To quote the fund’s latest update, “The market is clearly betting on multiple and perhaps even extreme cuts to end 2024. While this seems unlikely to us, in the end it doesn’t matter, as we will follow our rules regardless.”
Equities Opportunity
On the equities front, TFPN’s latest portfolio adjustments don’t suggest a reversal in its long bet as much as it simply tones down the overall positioning. The portfolio remains net long equities. But some long positions have decreased as market leadership changes from growth to value.
“Conditions continue to be mostly favorable for equities, as evidenced by the number of uptrends,” the fund’s report says. “The pivot from hawkish to dovish in monetary policy and the upcoming U.S. election will likely keep equity markets on edge as we finish out 2024.”
The Fairlead Tactical Sector ETF (TACK ) is run by Fairlead Strategies Founder Katie Stockton. It’s another strategy employing trend following to select and weight positions.
To quote the fund’s prospectus: “Because of the influence of overall market psychology on individual stock performance, technical analysis of trends at the market and sector level is key to the Subadvisor’s investment strategy and its effort to outperform the S&P 500. The Fund’s strategy is designed to benefit from market uptrends while minimizing downside risk during downtrends.”
TACK’s portfolio is currently tied to eight of the S&P 500 sectors, including utilities, industrials, technology, materials, communication services, healthcare, consumer staples, and financials. Notably absent are consumer discretionary stocks and real estate. Those two sectors were in the mix earlier this year, but technical analysis no longer supported them. In their place are allocations to consumer staples and utilities.
Downside Protection
As both TACK’s and TFPN’s strategies point out, trend following works to capture upside as much as it does to protect capital on the downside. By objectively looking at data, the diversified approach is often good at stepping in and at cutting losses as needed.
But what happens if a trend changes on a whim?
According to Robinson, that happens sometimes, and managers can get allocations wrong. TFPN manages that risk by making sure positions have stop losses in place.
“The idea is that if you are wrong, you are not wrong for very long,” Robinson said. “Trend followers aren’t known for being the life of the party, but we always live to fight another day.”
For more news, information, and analysis, visit VettaFi | ETFDB.
