Top Traders Unplugged
SI295: Trend Followers - The Unwanted Party Guests? ft. Nick Baltas
May 11, 2024
Expert in trading signal direction and portfolio construction, Nick Baltas talks about trend following, risk allocation, and equity momentum. He explains why trend followers might be considered the 'unwanted guests at the party' and the importance of allocating risk to where opportunity lies. The discussion delves into signal direction versus signal strength in portfolio construction and the power of trend following as a risk allocation tool.
01:01:19
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Quick takeaways
- Signal direction trumps signal strength in portfolio construction, risk allocation to opportunity is prudent.
- Equity momentum's concentration poses risks, timing momentum trade is challenging.
Deep dives
Equity Momentum and Market Volatility
Equity momentum has surged in the US market, driven by the AI hype and tech stocks like NVIDIA. This strong performance has led to a self-fulfilling cycle where outperforming stocks continue to rise. However, concerns arise regarding the high level of concentration in indices due to this momentum, which has led to intense buying and potential overexposure. The challenge lies in timing the momentum trade and preparing for a potential downturn, which historically can be linked to momentum crashes. The article explores this phenomenon by drawing parallels between momentum trading and the dynamics of a social gathering, highlighting the difficulty in predicting and managing the consequences of a momentum rally.
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