A Discounted View

In November 2005 Cole Wilcox and Eric Crittenden of Blackstar Funds LLC* (now Longboard Asset Management) published a research report analyzing the effectiveness in using a Trend Following   trading strategy in the US equity markets.   Both fund managers were using Trend Following successfully in the futures markets for many years.   Their success with Trend Following, as well as their peer's results in similar markets , piqued their curiosity and led them to conduct this research.   The strategy tested is a long-only Trend Following program. Trend Following uses absolute price change to delineate strength or weakness in a particular security. In this case, the researchers added long exposure on positive absolute price changes that resulted in an all-time high on a one week closing basis. Before actual testing began, Wilcox and Crittenden made sure to address any data issues. For example, given the expansive time horizon for testing, the authors account ...

Since Crude Oil began its long-term decline in the early Fall of 2014, the commodity has yet to find meaningful support and forge a sustained reversal. However, the most recent lows in January and February 2016 appear to have formed a double bottom. This pattern can be constructive for future price action . In Technical Analysis a double bottom is a price pattern that forms after a sustained downtrend makes a low, reverses higher, then retraces back to around the previous low, and finally proceeds to move higher again. The breakout from a double bottom is confirmed when the price moves off the second low to a point that is higher than the reversal peak from the first low. Sometimes the double bottom may be symmetrical and other times there can be some asymmetry between reversals. Currently, Crude Oil is exhibiting asymmetry in its double bottom. Thomas Bulkowski coined the different price bases “Adam” and “Eve” depending on the shape of the move. “Adam” reversals are typically...

Despite the title of this post, this is not another analogy between long-term investing and the story of the tortoise and the hare. Instead, in the trading world a Turtle is known as a protégé of Richard Dennis and William Eckhardt, who ran a Commodity Trading Advisor (CTA) business in Chicago during the 1970’s and 1980’s. These two traders conducted a trader training experiment based on disparate opinions on whether or not trading was an innate skill or could be developed. After the first round of successful training, another round of testing was completed with similar results. That is, the Turtle trader trainees were able to trade profitably using the set of rules taught by Dennis and Eckhardt. One of the trainees was Jerry Parker who went on to found and run Chesapeake Capital Management for the last few decades. His firm specializes in medium to long-term Trend Following  trading principles that he learned while in the Turtle program. In a recent interview Parker highlight...

Despite the title of this post, the curious development of animal anatomy will not be the topic of discussion. Instead, readers will have an opportunity to observe a potential reversal move underway in equity markets and crude oil delineated by this distinctive price action. No trend can last indefinitely and being able to spot signs of a reversal will help a trader better manage a position. One such method is identification of price action through what Dr. Alexander Elder describes as Kangaroo Tails. This sort of price behavior has a unique pattern. Elder states, “A Kangaroo Tail consists of a single, very tall bar, flanked by two regular bars, that protrudes from a tight weave of prices” (How to Trade for a Living, 65). Kangaroo tails that close down indicate a potential market top whereas when it closes up a possible reversal higher is developing. As with most patterns, price action on a long term basis usually carries more weight as it represents a general shift in the market ...

In Mebane Faber’s paper, “Quantitative Approach to Tactical Asset Allocation,” he builds a quantitative market-timing model that employs a trend-following strategy with built-in risk management. Specifically, he utilizes a moving-average-based trading system which is the most commonly used trend-following method. The system rules are simple and are as follows: Buy Rule: Buy when monthly closing price > 10-month Simple Moving Average (SMA) Sell Rule: Sell and move to cash when monthly closing price is < 10-month SMA At most, this system will rebalance monthly if a market is range-bound. However, when using the 10-month SMA (near equivalent to the 200-day SMA) as a trading signal, systems generally have a propensity for less turnover than other actively managed strategies. The converse, and one basis for comparison, of an actively managed strategy is a passively managed system. Faber’s research compares the model against a buy-and-hold (i.e. long) allocation to the S...