Rescuing turtles - How the ABCT can help trend followers part II

Last week I introduced readers to trend following strategies of Michael Covel. Those who follow trends are sometimes called "turtles." Covel and others admit that trend followers have sailed into troubled waters lately.

The Austrian business-cycle theory can help trend followers by taking some of the uncertainty out of trend directions. During bull markets, such as characterized the first six years after the recession, the trend was up about 90% of the time with small dips because 1) the Fed was printing new money like a counterfeiter and inflation rose; 2) profits rebounded as the economy naturally turned around ,and 3) growing risk tolerance drove PE ratios to the sky.

Covel recommends trading the long term trends in his books and the expansion phase of the business cycle is one of the longest, lasting on average about six years. An trend following investor familiar with the ABCT will not mistake dips for trends.

Rescuing turtles - how the ABCT can help trend following investors part I

Futures magazine wondered in 2013 if trend following as an investing strategy was dead:

In 2012, the aggressive and persistent actions by central banks and other authorities worldwide served to maintain an unfavorable market environment that began in 2009 for most trend following systematic programs. Many short, medium and long-term trend following CTAs, as well as other trend following hedge fund strategies performed poorly... While these indexes all reported losses for the second year in a row, the S&P500's climb (+13.4%) continued through year end. Although markets for hedge funds generally were better than for CTAs,... the HFRX Global Hedge Fund Index rose only 3.5% in 2012...the Newedge Trend Following CTA Sub-Index is down 5.89% since the bottom of the financial crisis in March 2009. 

This performance contrasts sharply with longer term numbers, particularly in the CTA space. Since 1980, as measured by the Barclay Hedge Btop50 Index of CTAs, managed futures have returned three times that of the S&P500, approximately 32 times an initial investment vs. 11times an original investment for the S&P 500. And in 2008 the S&P was down 45% while the Btop50 was up 14%.