As the market continues to digest the ultimate impact of a global economic shutdown, many participants have begun forecasting what they believe an ultimate recovery will look like.
As short hand, they've taken to using letters to describe the shape of the path they expect the market to follow. Those who are more bullish may expect a fast, V-shaped recovery while the more bearish might forecast a more permanent L-shaped reset.
And then there are calls for U's and W's. I've even heard "Nike Swoosh"-shaped forecasts.
Trend following is inherently path dependent. The depth of the market drawdown, duration of the recovery, and shape the recovery takes will ultimately have a large impact on the success or failure of a given model.
This week, we use simulation-based techniques to draw out different potential recovery paths to explore how different trend following speeds might perform. For investors with a particular view as to how a recovery may play out, this data may be insightful for the types of trend following models they might look to employ. For those without a view, we believe it continues to reinforce the importance of a diversified approach. (PDF)
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