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Chaos in the system – why stock market forecasts rarely come true

Chaos in the system – why stock market forecasts rarely come true

Market forecasts are a must for large fund companies and banks. Business media gratefully include them in their programs, as they seem to promise orientation in the complex structure of the financial markets. Annual outlooks are particularly popular because they can be safely forecast. If the predictions turn out to be wrong in the end, no one remembers them. Leo Willert, CEO and Head of Trading, analyzes how unemotional trend-following models deal with such market forecasts. ARTS Asset Management.

editorial staff
16 November 2021 09:25


The truth is in the course

Incorrect prognoses in the financial markets are actually more the rule than the exception, because even the most experienced experts are not prophets. The corona crisis also showed how difficult it is to forecast the correct stock market development. When the World Health Organization (WHO) declared the novel coronavirus disease COVID-19 to be a pandemic on March 11, 2020, the leading indices had been on the low rise for a good four weeks. As so often in the past, the stock market was a good indicator of future developments. “That this is often the case is that market movements reflect“ all available knowledge ”. In other words: Everything that all market participants collectively know about the markets – and their probable future – or believe they know, is already reflected in the price at all times, ”explains Leo Willert.

Leo Willert, CEO of ARTS Assets ManagementARTS Assets

Most hated stock rally

“Speaking of the corona crisis – from mid-February of the previous year we experienced the fastest crash in stock market history, followed by the fastest recovery in stock market history,” adds Willert. What really bothered the majority of professional investors, however, was the fast-paced price rebound that kicked off March 23, particularly in the US. This phase is now history as the “most hated rally of all time”. What happened? In view of lockdowns and limited consumption opportunities, a good part of the direct government transfers to private households flowed into the stock market and catapulted the S&P 500 (US stock index) back to pre-crisis levels by early August and well beyond that by the end of 2020. Many professional investors fixed their gaze on the devastating economic data and thus missed a good part of the rally. Here, too, the market itself was the better forecasting tool for its further development than the consensus of the experts. “In all honesty: If you had told me at the end of March 2020 that the markets would go through the roof in a pandemic and in one of the greatest economic crises of all time, I would never have believed it. Fundamentally, that was in no way understandable. I was happy to have a rules-based trading system that made the decisions for me. Like a passenger, I watched my ARTS trading system buy stocks week after week. And in the end I have to say: It was right – as is usually the case, “sums up Leo Willert.

Follow the trend

“The trend is your friend” or “Follow the trend until the end, when it bends” are not only some of the best-known stock market wisdoms, but are still valid today. So follow the trend as long as it is intact and get out when the market turns and starts to make losses, is also the top priority of the ARTS trading system. “By the way, it’s never about predicting future developments, because trend following is always a forecast-free procedure. Instead, one tries to identify existing market trends with statistical methods and invests in their continuation. The exit is also rule-based – namely when the end of the trend is determined, “adds Willert.

Quantitative investment strategies not only but very much like to fall back on technical chart models. Trend indicators indicate the point in time for entry and sale. Here, computers have a better overview than human investors.ARTS Asset Management

Of course, even the most complex algorithms for trend following models do not offer a 100% hit rate, because markets are chaotic systems with a very large number of influencing factors, including human psychology with its susceptibility to greed and fear. What trend following certainly does is to avoid such psychological traps. Losses are never “sat out” here, but limited in a disciplined manner before they can take on painful dimensions. Profits, on the other hand, are not “taken away” for fear of losing them again, but rather expanded until the end of the trend is effectively recognized. This strategy leads to the reliable avoidance of typical investor mistakes and often also to better risk-adjusted results than simply holding the market portfolio.

ARTS trend following fund

Trend following strategies, such as those in C-QUADRAT ARTS Total Return Global AMI (ISIN DE000A0F5G98) are used, have another strength compared to the traditional buy & hold approach: The application to a very large investment universe (10,000+ target funds & ETFs) results in a portfolio construction that is always tactically oriented, in which the regions and sectors are always up-to-date strongest momentum and thus the chance to outperform the market as a whole.

The mixed fund represents an active asset management approach that is not based on any benchmark. The fully automatic trading program developed by ARTS Asset Management follows clearly defined, quantitative rules. Depending on the market situation, the fund can build up to 100% equity quota and in order to limit the risk in negative stock market times, the equity quota can be reduced to 0% and switched to more conservative bond and money market funds or money market-related investments. The C-QUADRAT ARTS Total Return Global AMI prove its stability, especially in the past times of crisis. This significantly reduced losses in stress markets and saved investors’ nerves.

Legal notice:
This marketing communication is for informational purposes only. Past performance results are not a reliable indicator of future performance. It is expressly referred to the risk information in the sales prospectus and the key investor information (“KID”) under referenced.

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