How Trend Following Helped Investors Dodge a Brexit Blindside By Stephen Scott

How Trend Following Helped Investors Dodge a Brexit Blindside By Stephen Scott

Market participants focused on economic fundamentals were blindsided by Britain’s move to exit the European Union. Trend followers, however, had hints that the market expected the “shocking” Brexit long before last Thursday.

The fundamentals seemed clear: Britain’s extensive trading with other European countries, the nearly 3 million British jobs linked to the EU, the benefit of a stronger united defense against security threats and more global clout both economically and politically all indicated a vote to remain in the EU.

In fact, as the New York Times reported that into the early evening Thursday, the betters put the odds of remaining in the EU as high as 88%.

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However, the issue with fundamental data is that you can often take the same information and make opposing arguments. For example, that same united front that leads to a stronger defense also means that the UK’s government would relinquish control of the country’s immigration policy.

The Brexit vote was clearly going to be very close. In the months leading up the referendum, upward trends were visible in U.S. treasury bonds and the Japanese yen, with downward trends in the British pound and EU bank stocks that were not aligned with the fundamentals. Being on the right side of those trends would have made you a lot of money on Friday.

Fundamental analysis is what should happen – the why. Trend analysis identifies what is actually happening – the what. Although trend isn’t a crystal ball, often the market will hint at what it’s intending to do, even during a hotly contested event like the UK’s referendum.

In hindsight, some of the fundamentals give context to the trend: a Brexit could surely send the British pound plummeting or trigger a flight-to-quality trade to U.S. treasuries. The uncertainty of what comes next would mean that European stocks get hammered.

But other times, trends give context to the fundamentals: there’s nothing about Japanese fundamentals that says the yen should soar, yet the uncertainty the Brexit vote created in the UK and across the EU sent the yen to highs not seen since 2013.

One thing is clear after the Brexit vote. When fundamentals suddenly align with long-term trends, investors with traditional portfolios had better buckle up. They’re in for a bumpy ride.

Stephen Scott is with the portfolio management team at Longboard Asset Management, LLC, an alternative investment firm specializing in long-term trend following strategies.

How Trend Following Helped Investors Dodge a Brexit Blindside By Stephen Scott

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