Trend Followers on the Mend?

Chidem Kurdas

Traders who follow long-term trends made good in November. But it is an open question whether they’re out of the doldrums that afflicted them in recent years.

They returned 4.2% last month according to the Lyxor index but the year-to-date return is a mere 1.7%, reflecting poor performance during most of 2013.

Trend followers do best when established tendencies persist in financial markets, such as the continued rise in U.S. stocks. This generates data for computer models to identify the trends. Earlier in the year there was too much turbulence.

The November gains reflect the upward trend in risky assets and currency movements, according to Philippe Ferreira of Lyxor.

The fact that the Federal Reserve has been in a holding pattern no doubt contributed to smooth trends. There are two schools of thought on what will happen when the Fed starts tapering its $85-billion-a-month bond purchases. One says this is already baked into the markets, so the effect will be minimal.

The other says without the Fed’s monthly infusions, both stock and bond markets will tank. A radical a reversal of trends is typically bad news for trend followers.

Investors are skeptical of the strategy, in view of its track record. Even those interested are taking a wait-and-see attitude.

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