Alpha Capture

This has been a phenomenal market for trend followers. I’ve been enjoying riding this uptrend for a while now but even I’m realizing this is starting to look easy, and that’s not a good sign. Good investing or trading is never supposed to be easy. Boring, yes. But not easy.

It’s starting to remind me of my 5 year old’s soccer league. Every now and then you get one of those mismatches where after 15 minutes they’re up 5-0. The game’s already been won so you try to swap out your hat-trick hero and tell them to keep the celebrations down, no gloating, but they just keep scoring. 6-0. Now you kind of shrug at the opposing manager as if to say “Kids eh, what can you do, can’t stop them scoring.” 7-0. Now it’s just getting embarrassing. You feel sorry for your opponents, you know they must be feeling crushed and you’re trying to contain your delight at how huge a win this is. I mean it just couldn’t get any better. Oh wait, 8-0. Finally, the other team scores, 8-1. Such is your relief that you greet it with a sporting cheer as loud as the one you gave your team’s first goal. It was still a competition back then.

A couple of weeks ago I highlighted the folly of trying to pick tops, and suggested clients would be better served if their brokers said ‘look, we’re bearish, but the market’s at all time highs, so until price confirms our view you should stay long.’

The S&P had just closed at 1597.59. For those keeping score at home we’re now at 1658.78.

Top-Callers 0, Trend Followers 61.19.

I think for the bears we’re now reaching the ‘if you can’t beat ‘em, join ‘em’ phase of this rally. A capitulation of sorts. The top-callers have gone quiet, and there’s no new ones coming in to replace them. No-one’s calling it anymore. (I’m not about to either.) But when I look at my screen mid-morning to see where everything stands I’m almost expecting to see everything up. This week on my stream I’m seeing jokes about how strong this market rally is, there’s dark humor about the shorts on the other side. We’re starting to feel sorry for them having seen them stretchered off the field after those nasty challenges from our star players $GMCR and $TSLA.

When you have a specific frame of reference in which you’ve operated for many years, you come to recognize when something is within your system parameters but not necessarily within your expectations. Think of it as recognizing something that is possible but not probable. I’m having that feeling a lot in the last few days.

Yesterday when I added a long position in the dollar via my trend following futures system, I noted the performance of all the open positions. It only trades 10 markets. It has a position in 7 of them. They’re all winning. If you’re familiar with trend following you know we don’t typically have high strike rates. We have lots of small losers, and fewer, but much bigger winners. My experience tells me it’s unlikely all 7 positions will finish winners.

Of my 31 open stock positions 29 are winners, and even the 2 losers look good. Current strike rate YTD for all positions, open and closed; 67%. That’s exceptional for a trend follower. Most don’t get over 50% win rate.

I’m not being boastful or complacent when I say this is too easy. Far from it. It’s an acknowledgement of the magnitude of the move we’ve seen. When you don’t try to pick tops or have meaningless price targets, and only take profits when a trend is over, this is a dream market. But I’m also realistic enough to know it’s not sustainable.

There’s a big difference between expecting a pullback, and predicting or looking for one. I’m not going to change a single thing. I will still let my winners run, and cut my losers. I will continue to ride every uptrend until it’s over, but I am getting to the point where I am expecting to have that definition of when a trend is invalidated put to the test.

Right now I think this game is 7-0 or 8-0. That consolation goal is coming. The bulls still have the ball but they’re pushing so far forward now they’re risking getting caught on the break and giving up that clean sheet.