Bernard Drury (PDF) is a trend trader today, but he started as a fundamental grain trader. He is in my new book.

Disclaimers:

Our firm can not promise you will earn like returns of traders, charts or examples (real or hypothetical) mentioned. All past performance is not necessarily an indication of future results. Data presented is for educational purposes. This information is not designed to be used as an invitation for investment with any adviser profiled. All data on this site is direct from the CFTC, SEC, Yahoo Finance, Google, IASG and disclosure documents by managers mentioned herein. We assume all data to be accurate, but assume no responsibility for errors, omissions or clerical errors made by sources.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

Great conversation today with Paul Mulvaney of Mulvaney Capital. Mulvaney will be featured in my new book (along with other trend traders). He has seen his robust trend system work through thick and thin for over a decade. While he doesn’t throw around fundamental stories (why would he), I guarantee his wisdom will be great insight for those investors who still want absolute returns.

Finished up an interview today for a new book with a man who has been successfully trading trends since the mid 1970s. He mentioned how he has trained his wife to trade trends and that to this day she still keeps track of her trades with a hand written spreadsheet. That doesn’t mean TradeStation isn’t a fine tool, but just keep the desire for the latest toy and or gadget in perspective.

Trend followers don’t care about rich valuations — however rich is defined. That said, John Hussman does lay out interesting observations.

“Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this “cyclically-adjusted P/E” or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation). Prior to the mid-1990′s market bubble, a multiple in excess of 24 for the CAPE was briefly seen only once, between August and early-October 1929. Of course, we observed richer multiples at the heights of the late-1990′s bubble, when investors got ahead of themselves in response to the introduction of transformative technologies such as the internet. After a market slide of more than 50%, investors again pushed the Shiller multiple beyond 24 during the housing bubble and cash-out financing free-for-all that ended in the recent mortgage collapse. And here we are again. This is not to say that we can rule out yet higher valuations, but with no transformative technologies driving the economy, little expansion in capital investment, and ongoing retrenchment in consumer balance sheets, I can’t help but think that the “virtuous cycle” rhetoric of Ben Bernanke is an awfully thin gruel by comparison. We should not deserve to be called “investors” if we fail to recognize that valuations are richer today than at any point in history, save for the few months before the 1929 crash, and a bubble period that has been rewarded by zero total return for the S&P 500 since 2000. Indeed, the stock market has lagged the return on low-yielding Treasury bills since August 1998. I am not sure that even members of my own profession have learned anything from this.”

The problem is one of timing or predicting when all this will happen. He is most likely right, but I am not betting my capital on this. His work lays out for the observant a foundation (read: behavioral finance) for why trend following will always make money — always. Boom bust, boom bust.

Caught this ‘line’:

“Grains all made subtle bull break out technical moves last week as continued fear of a global grain panic builds premium into these markets. I do believe that the grain rally should be sold into as it will be short-lived in 2011. The market is in the ‘what-if’ stage of the winter season as they get ready for plantings. What if China needs to import corn? What if Australia’s wheat crop is gone? What if cotton acreage squeezes beans? Well how about what if the market meets demand? I do not expect grain prices to test 2008 levels – the fundamentals are not there yet and the hype isn’t strong enough. Soybeans are a good spread play against corn, but overall I would be a put buyer across the board. Rice is a sell into this short covering rally with straight puts.”

Let me add some insights:

You don’t need to know whether there is a global grain panic or not to trade.

You don’t need to know anything about Australia’s wheat crop to trade it.

Etc. Etc.

Misquoting Keynes

Why Politics and Investing Don’t Mix

At The Current Rate Of Growth, The S&P 500 Will Surpass Its All Time High On June 27, 2011

Putting the Jobs Recovery in Perspective

No trend trading insights there, but interesting.

An article forwarded to me today shows a writer not sure whether he is coming or going:

As an analyst, I’m a fundamentalist at heart, focusing primarily on fund managers whose success owes to bottom-up research and strict valuation work. In advance of a panel I’ll moderate at this summer’s Morningstar Investment Conference, though, I’ve been researching the scholarship surrounding a technical strategy: investing purely on the basis of upward price momentum. It’s a fascinating topic, particularly for those who favor fundamental money managers, a group that, on average, has generally lost to the relevant bogies. Contrary to that track record, the data on price momentum seem to show remarkable long-haul success. As I noted last month, Tom Hancock–co-head of GMO’s global quantitative equity team–has crunched the numbers and found that, between 1927 and 2009, a simple strategy of investing in stocks with the highest trailing-12-month returns surpassed the broader market by 3 annualized percentage points. A healthy dose of skepticism is in order. While momentum may look terrific under laboratory conditions, it can be devilishly difficult for actual investors to exploit. The strategy Hancock tested requires monthly rebalancing of a super-sized portfolio, one comprising fully the best-performing quartile of U.S. large-cap stocks. That’s an onerous task and an expensive one, given the level of portfolio churn. It’s no surprise, then, that the universe of pure-play momentum funds is exceedingly small. Nor is it a head-scratcher that many funds using the tactic as an element within a broader strategy have struggled long-term. Transaction costs drag on returns, after all. And, as with any strategy, price momentum’s effectiveness waxes and wanes. Though it notched a strong return to form in 2010, the previous decade was exceedingly tough on the tactic. Those scars still show. Substantial challenges exist even in the lab. Famously, correlation isn’t causation, but when back-testing for a particular signal, that often becomes a distinction without much of a difference: The range of answers any set of data provides is always circumscribed by the questions an analyst asks, making it all too easy to simply find what you’re looking for. That risk of confirmation bias is nicely illustrated in the speech Vanguard founder Jack Bogle delivered as the keynote speaker at Morningstar’s 2002 conference. Criticizing “the vastly oversimplified but typical way we look at long-term results,” Bogle zeroed in on the vaunted small-cap and value-stock premiums, showing that, although it may seem in the aggregate as if those two asset classes have persistently outperformed, that’s not what the data show: Relatively narrow portions of a time series spanning more than 70 years account for the bulk of the excess returns. Could a similar dynamic be at work in the research surrounding momentum, with neatly rolled-up, aggregate-level data points head-faking in the direction of wrong–or at least incomplete–conclusions? Well, sure. Any attempt to isolate the significance of a single variable (or even a small handful of variables) in a vast sea of data runs ample signal-to-noise risk. In addition to time-series static, for example, how much of momentum’s long-haul outperformance may owe to style? Has the tactic’s showing been powered by pockets of success in, say, growth stocks or mid-cap names? Our colleagues at Ibbotson ask (and answer) that question in a recent white paper analyzing the influence of price momentum on the returns of composite mutual fund portfolios. I’m still scrutinizing the particulars of the study (which also examines the impact of investment in low-liquidity stocks), but the conclusion is striking: Regardless of where in the style box they reside, portfolios comprising funds that provide the greatest level of exposure to high-momentum stocks significantly outperform those with the lowest levels. Widening the analytical lens to include style represents a leap forward in terms of understanding the persistence of momentum, in part because it prompts related, though more fundamental, questions. What, for example, is the average manager tenure of the high-momentum funds that drive the bulk of the outperformance? Has the tactic generally fared better among higher-quality names or more-speculative fare? Widening the lens even further to include these and other qualitative questions can further strengthen our understanding of momentum. They help to clarify and refine what the tactic has actually contributed and what portion of the gains ascribed to it may owe to other attributes–profitability metrics, say, or in the case of funds, managerial tenure. Those factors almost certainly account for a greater than zero percentage of results that pass as effects of a momentum premium. How much greater is a question in need of greater study. — Author Shannon Zimmerman is an associate director of fund analysis at Morningstar.

A very confused person. Maybe, my work this year will help him out!

The history of trend following trader Transtrend:

Following a research project that was initiated in 1987, Transtrend B.V. (“Transtrend”) was established in 1991 as an asset manager purely focused on systematic trading strategies. Transtrend’s approach is aimed at exploiting trends in financial and commodities markets and is entirely based on quantitative analysis of typical price behavior in these markets. Transtrend’s trading strategies have no directional bias and can go long or short in their attempt to benefit from price patterns that represent good profit expectancy over time.

Transtrend slide show (PDF).

Performance (The Enhanced Risk (USD)/Transtrend’s Diversified Trend Program):

Disclaimers:

Our firm can not promise you will earn like returns of traders, charts or examples (real or hypothetical) mentioned. All past performance is not necessarily an indication of future results. Data presented is for educational purposes. This information is not designed to be used as an invitation for investment with any adviser profiled. All data on this site is direct from the CFTC, SEC, Yahoo Finance, Google, IASG and disclosure documents by managers mentioned herein. We assume all data to be accurate, but assume no responsibility for errors, omissions or clerical errors made by sources.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

No one can promise you these exact trend following returns, but our education will put you on the right track toward the chance for big numbers:

Dunn Capital:

website; disclaimer below

Abraham Trading:

website; disclaimer below

Altis Partners:

website; disclaimer below

Tactical:

website; disclaimer below

Saxon Investment Corporation:

website; disclaimer below

Mulvaney Capital:

website; disclaimer below

Chadwick Investments:

website; disclaimer below

Hawksbill Capital Management:

website; disclaimer below

Disclaimers:

Our firm can not promise you will earn like returns of traders, charts or examples (real or hypothetical) mentioned. All past performance is not necessarily an indication of future results. Data presented is for educational purposes. This information is not designed to be used as an invitation for investment with any adviser profiled. All data on this site is direct from the CFTC, SEC, Yahoo Finance, Google, IASG and disclosure documents by managers mentioned herein. We assume all data to be accurate, but assume no responsibility for errors, omissions or clerical errors made by sources.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

From a reader Jim Cole:

Michael, you posted recently that you were reviewing comments on Amazon about your work, trying to understand why some people didn’t get it. I attend a monthly meeting of local traders, and I’m the only TF. I can’t tell you how many times I’ve tried to get folks to understand how fundamentally different TF is from how they trade, but I never seem to get through to anyone. I’m part of a panel at next week’s meeting, so I came up with a short story that I’m hoping will make a dent. Here it is:

Six traders are attending a conference in West Hollywood: an Inexperienced Trader, a Tipster, a Chart Reader, a Trendfollower, a Pension Fund Manager, and Bernie Madoff. They decide to go out to the beach at Santa Monica. They didn’t rent a car, and one option is to take a bus. One bus to Santa Monica comes west along Wilshire Blvd, and another bus comes north along La Cienega Blvd. Each bus stop is about a block away from the intersection of the two thoroughfares.

The Inexperienced Trader looks up the timetables and declares, “A La Cienega bus comes before a Wilshire bus at this time of day, so it should arrive first,” he says, and so he walks a block down La Cienega to that bus stop. He’s happy, because the thing he most wants to avoid is having to work hard, and this way, all he has to do is step onto the bus when it arrives.

The Tipster sees Jim Cramer walking down the street, so he asks Cramer which bus to take. Cramer jumps up and down and screams that traffic is very light on La Cienega today. The Tipster is happy because an expert told him what to do, so he joins the first fellow at the La Cienega stop.

The Chart Reader stands on the sidewalk for a few minutes, studying the traffic patterns and lights. “I see a double top forming on westbound Wilshire, so there’s a 52% chance of a retracement there. That means the La Cienega bus should arrive first.” He’s happy, because he has a reason for having made his choice. He, too, walks a block south and waits for the La Cienega bus.

The Trendfollower knows that the Inexperienced Trader is just gambling; he may as well have flipped a coin. And the Tipster? The Trendfollower has a nice chuckle thinking about him. But the Trendfollower also can’t understand why the Chart Reader made his decision. First off, the Chart Reader is foolish for playing the odds, since today is the only day he’ll ride the bus to Santa Monica. If he is indeed correct about the probabilities, and he rode the bus every day, his gamble might pay off over time. But he has about as much chance of being wrong as being right on this particular day. And yes, traffic lights turned from green to red, and back again. Yes, cars turned left and right and honked their horns. But why that has anything to do with which bus will come first, the Trendfollower just can’t fathom.

The Trendfollower has no bias about which bus will come first; he just wants to get onto that bus. So he stands at the corner of Wilshire and La Cienega, looking first down Wilshire, then down La Cienega, watching for a bus. When a bus is spotted heading west on Wilshire, he trots a block down to that bus stop, arriving just in time to step onto the bus.

And the other two? Well Bernie Madoff’s not about to take a bus. And he’s not about to pay for a limo, either. So he tells the Pension Fund Manager, “If you get us a limo, I’ll tell you what you want to hear all the way to Santa Monica.” And they have a very pleasant ride.

Hmmm…