The Trend is Not Your Fickle Friend, It is Your ONLY Friend

John Hussman wrote an anti-trend following piece yesterday. My views:

1. Hussman puts forth sensibilities on the economy that I often share. He sees the issues clearly. In fact, I would love to get him on my podcast.

2. Do I have a counter to his anti-trend following piece? Yes. It is my 4 books in total. Also, trend following performance might be a good conversation starter for the debate.

3. Those who have not read my books will accuse me of being lazy by not responding here online. Patience. That is coming, but for now I wanted to acknowledge Hussman’s views.


I posted the above retort late last night and this morning no more comment was needed as John Hussman had responded directly via email:

Saw your quick post this morning relating to my weekly comment. I think I’ve unintentionally drawn fire because my key point may not be clear. My argument is not a criticism of trend-following in a general sense:

“Does all of this suggest that trend-following measures should be ignored? Not at all”

The point of the piece was to discuss the difficulty with simple moving-average crossover systems, which many investors seem to think are wildly effective in and of themselves. We periodically get questions of the form “the S&P 500 is above its 200-day moving average” as if this is a sufficient and obvious basis for hedging decisions. It is that question that the piece addresses.

The second part of the piece, on multiple sensors, discusses factors that I believe are useful in building a trend-following method. In particular, it focuses on using a variety of confirming evidence, rather than a single moving-average. We certainly do use trend-following factors in our own approach, but they are not limited the simple MA crossover variety.

From a broader perspective, valuations, trend-following measures, market internals, economic factors, sentiment, and other factors are all important in our investment analysis. It may seem that we don’t rely on trend-following considerations given our “miss” in 2009-early 2010. But our defensiveness in that period was due to my insistence on stress-testing our methods against out-of-sample Depression era data, which I’ve regularly discussed in our weekly comments. The ensemble methods that satisfy our validation requirements would have indicated a constructive position during much of the 2009-early 2010 period, supported by trend-following considerations, but there are certainly periods – particularly today – when our stance will differ from the stance that a pure trend-following approach would advocate.

We’re probably actually much more in agreement in terms of investment philosophy than your brief post indicates. Again, the piece was not an attack on trend-following itself, but was focused on simple MA crossover strategies that investors imagine to be wildly profitable and applicable without further analysis. If you re-read the opening paragraph of the piece, I think that intent is right up front.

Hope that clarifies things.

Best wishes,
John P. Hussman,
Ph.D. Hussman Strategic Advisors

Thanks John. Now that we are connected I have to angle him onto the podcast!

You might like my 2017 epic release: Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets (Fifth Edition). Revised and extended with twice as much content.

6 thoughts on “The Trend is Not Your Fickle Friend, It is Your ONLY Friend

  1. Mr. Michael, your aggression in defending your viewpoint seems like “man with only a hammer”.

    Your name or trend followers name doesn’t figure in Forbes 100 list. You may be good at writing but you do not even practice what you preach meaning you do not trade!

    “Everybody gets what they want” as the great trend trader Seykota says. Perhaps what you want is to only win arguments. Be rational.

  2. Some trolls are so anxious to rip me that they fail to notice that I am actually praising someone (i.e. Hussman) and giving their view and response a full airing. Go figure. Footnote: My firm does not trade client money, correct. Just internal.

  3. Grrr. And I was hoping that Trend Following was dead again…a good sign that a monster trend is on the way.

  4. I think the important point here is that it’s not about whether an indicator is right or wrong, it’s that your results will depend more on your risk management. You can make money by flipping a coin to decide whether to buy or sell so long as you have risk management in place, so the indicators are somewhat less important

  5. Hussman blames his whiff on the 2009 upturn on working “to make our approach robust to Depression-era outcomes.” He further states, “From a
    fiduciary perspective, I continue to believe that ensuring the ability
    to withstand extreme strains was necessary.” Of course it’s necessary. It’s also necessary as a trend follower. His entire article is spend knocking down a strawman that assumes that trend following by itself is the risk management overlay and requires no other thought with regard to position sizing or managing heat.

    Hussman seems like a smart guy, but this analysis was lazy and incomplete and he clearly misses the entire rationale behind the concept. No approach, no amount of research assures that you will always be right. This is precisely why we practice risk management. You’d think his performance over the last few years would have made that clearer to him.

  6. My RIX Index has accurately pinpointed changes in the trend of the stock market for over 40 years. Most people think that it can’t be true, but they are wrong. It’s not unusual to find that most investors are wrong, but then, that’s what makes a market.

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