A look at long term trends (and almost ready for a bull call spread)

Hi,
because of the beginning year very strong volatility, I decided to write this post to analyze long term trend in main asset classes (S&P500, Euro Stoxx, Nikkei, euro and US HY, Emerging bonds, euro and US govies). 
I do it monitoring the long term moving averages (on monthly basis) that are less "manipulable" by algos. Of course they continue to have the classic moving averages defects.
I decided to write this post because fundamentals are getting worse: US data are disappointing, China data as well and crude oil is collapsing. I don't go into further details unless someone ask me it explicitly, but what one must realize is that there are 2 opposite long term scenario for 2016-17

The First one is that this year is just like 2007/early 2008 and we lead toward a global recession with a drastic drop in the asset valuations
The Second one is opposite. Now is the scariest moment (like in 2011) but world will avoid recession and equity markets will return in an uptrend.

Have a look at the following moving averages and you'll see that we are in a situation similar to both 2007 and 2011. In stocks markets the moving averages are beginning to reverse down and prices are already below. But moving averages didn't cross yet on stocks.

S&P500: reminds 2011 so far

Euro Stoxx: high volatility just like in 2011

Nikkei: similar to 2008, but is choppier than other indexes

 Emerging bonds $: trend still up, stronger than 2008 so far

 

Euro HY: weakening signals, trend close to reversal just like 2007

 Euro governments 7-10y: trend is up

 Treasury 7-10 years: trend is up

 

 US High Yield already in downtrend like in 2008

In summary equities markets are now in downtrend, just like US HY.
Euro HY are on the "edge" of downtrend, while intermediate govies continues to trend up


The long term trends send a warning signal but, on the other side, the very high oversold equity situation offers a chance to play for a rebound.
In my opinion, I continue to be optimistic that the world will not fall in the recession this year. On the other side, we have now a more crowded situation on risk assets, because of negative rates on short term bonds and this increase the risk of flash crashes. Sovereign funds are probably selling strong too  because of crude oil drop.
I think that I'm going for myself to play a rebound for march, but using a bull call spread. That's because if I am wrong, the downside is high. An entry level could be around 300 in the Euro Stoxx to play for a 5% rebound. (use it for timing on Dax or Ftsemib or eurostoxx 50)


And I'll continue to allocate monthly like usual the rest of capital.
Stay tuned, markets in 2016 are going to be interesting.

2015 considerations and 2016 variations

Hi to everyone.
After the last post with allocations, I'm going with more details about 2015 and changes for 2016.

First of all you can see the performance of the allocations on the Etfs's benchmark on monthly basis. I don't consider transactions costs, taxes and slippage, therefore is just for example. In real performance would have been different of course, but the trend is this.
Knowing the future the optimal choice would have been to take money out in march and go in holiday for the rest of the year :)

The first thing that appear in the graph is that models began 2015 really strong, then the trend with severa months of life reverted and began a choppy period. My models suffered the second part of the year, especially the model 3 original.
A positive thing is that all models finished the year with a plus on theorical basis.

The Model 4 € close the year with a +2,8% return vs  5,3% of the equal weighted benchmark. It lagged the benchmark because of low exposure on european equity.

On the other side of Atlantic, Model 4 $ overperformed the equal weighted benchmark +0.4% vs -2.3%, therefore it did its job.

As you can check in the last post about January Allocations, I posted more variations of the models.
Aggressive and with changing weights.
I did it for 3 motives:
1) First, I made many months of out of sample test without posting on the blog and they performed in line and/or better that the original one;
2) the market conditions in 2016 could lead to some change of strategies
3) they could be more convenient for some kind of investor with higher risk profile

A big problem  for me (and not only) is the negative interest rates on the safer shorter government bonds in Europe. This will lead to have a sure loss when I go defensive. On the other side equity markets are not cheaper anymore therefore I don't feel comfortable with very aggressive models. I believe that in coming years returns of main assets will be lower than average last 3-4 years, therefore it could become more important to save money (and avoid deep losses) that look for high returns.
On the other side cash gives negative returns (or almost zero if you are a retail), therefore one must do something.
I am going to do that
1) I'll stick with defensive models 1 and 2, knowing that especially the 1 could lose next year.
2) I fear that models will experience higher volatility than historical, therefore I'll reduce money invested on them and I'll raise discretional choice;
3) I'll try to take some returns increasing that risk on model 3 using the aggressive variation. These means that the new versions of old models will try to raise equity exposure being in/out more often.
4) I don't use the model 4 for myself as my capital isn't high enough for that diversification and taxes, fees will kill my returns. I don't use model 3 with changing weights every months because the same reasons.

I fear that 2016 won't be rich, but as I can't know how the year will be  in real (I can forecast but without the crystal ball), I'll diversify my discretionary  investments with these models, trying to get some positive returns.
I believe volatility will be high these year and could not be for trend following models, but let's surf  the sea again. The worst thing is a choppy year without trends on main assets...or an year where bond and stocks go down together.
Good luck to everyone!!! Central banks excesses could show collateral effects starting this year

PS. The model I'll try to check this year will be these. They are many and this raise the chance of mistakes when I post returns and write allocations. To minimize this risk I'll try to post allocations at the beginning of each month as soon as I can, and post the considerations/performance over the month when I have time. In red the new version. Below correlations since 2000 where you can see that some are low correlated, other aren't. Being all trend follower methods, correlations are positive.
MODEL 1
 
MODEL 2 
 
MODEL 3 -
MODEL 3 (more aggressive) ***
MODEL 3 Variable weights ***   

MODEL 3.4 
MODEL 3.4 Variable weights ***
MODEL 3.4 (more aggressive) ***     

MODEL 3.5  ***                                                                   
 
MODEL 4 €
MODEL 4 € equity push 
MODEL 4 USA
MODEL 4 USA equity push  

January Asset Allocation

Here we go with January Allocations. In coming days I'll post considerations about these allocations and further models variations.
Generally models go defensive

ALLOCATIONS

MODEL 1 - Euro govies 1-3 years or sight deposits with a positive rate. 100%

MODEL 2 -  Euro Inflation govies bonds - 100%

MODEL 3 - Euro Inflation govies bonds             50%
                     Euro High Yields corporate bonds   50%

MODEL 3 (more aggressive) *** - Euro Inflation govies bonds               50%
                                                          Treasuries 7-10y                          50%

MODEL 3 Variable weights ***    Euro Inflation govies bonds               73%
                                                           Treasuries 7-10y     27%

MODEL 3.4  Japanese bonds                                   33%
                       Convertible bonds                             34%
                       Developed markets properties             33%

MODEL 3.4 Variable weights ***  Global Convertible                                    30%
                                                           Japanese bonds                                    37%
                                                            Global bonds                                      33%

MODEL 3.4 (more aggressive) ***      Global Convertible bonds          34%
                                                                  Japanese bonds                          33%
                                                                  Developed Market proprieties   33%

MODEL 3.5  ***   Japanese bonds                                                                       34%
                                Euro govies 1-3 years or sight deposits with a positive rate  33%
                                Euro floating corporates                                                         33%
                   
MODEL 4 € Euro govies 1-3 years or sight deposits with a positive rate    66,7%
                      Euro High Yields corporate bonds                                           11,1%
                      Euro government bonds                                                           11,1%
                      Global  bonds                                                                           11,1%

MODEL 4 € equity push Euro govies 1-3 years or sight deposits with a positive rate    66,7%
 ***                                    Euro High Yields corporate bonds                                           11,1%
                                           Euro government bonds                                                           11,1%
                                           Global  bonds                                                                           11,1%

MODEL 4 USA             Treasury Short term 1-3y  55,5%
                                        S&P500                             11,1%
                                        MSCI EAFE                      11,1%
                                        Emerging Bonds   $           11,1%
                                        Developed Proprieties       11,1%

MODEL 4 USA equity push      ***        Treasury Short term 1-3y  66,6%
                                                                    S&P500                            11,1%
                                                                    Emerging Bonds   $          11,1%
                                                                    Developed Proprieties      11,1%

*** As you can see I added some variations compared with 2015 models (in red). These are models that I had built along 2015 & monitoring. As in 2015 they performed better than others, I decided to upgrade them and post on the blog. It's becoming more time consuming to follow all these models, therefore I just will add weights at the beginning of month and comment & post performance tables later in the month. In the next post I'll explain more these models and show the 2015 summary. 

HAPPY 2016!!!!

I wish you an happy new year.
Personally I hope that this year will be definitively better than the last one!!

I'm going to update the new allocations in the coming days, because I won't be able to calculate allocations until next-mid-week