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By Todd HultmanDTN Analyst As the saying goes, "Even a blind squirrel finds an acorn now and then." That's how I felt this weekend after researching corn prices. It all started last Wednesday when I ran across an article by investment consultant Gary Antonacci, which showed numerous benefits from a simple trend-following approach he applied to a wide variety of assets including stocks, bonds and gold.* I have researched several trend-following methods over the years, but had never considered Antonacci's simple definition of momentum. I thought it would be interesting to test it on corn. Antonacci's hypothetical method was always in the market, either long or short, depending on the direction prices took the previous 12 months. If the price of gold, for example, was up over the previous 12 months, the system would go long. Each subsequent month, prices would be checked again and if the previous 12 months still showed a gain, the system would stay long. If prices were down over the previous 12 months, the system would go short. Overall, Antonacci's method showed modestly higher returns and significantly lower drawdowns for several different assets -- a win-win for incorporating trend in investment decisions. At first, my trials in corn were unimpressive, so I reduced the lookback period from one year to three months, knowing that corn had a stronger seasonal component than the financial assets Antonacci tested. To get a quicker glimpse of the data, I put together a scatter plot to see if there was any correlation in how spot corn prices fared the past three months versus how they fared one month later. To my surprise, the scatter plot showed no significant relationship between the two variables. From 1980 to July 2016, when the previous three months showed a gain in the price of corn, prices traded higher the following month 52% of the time. When prices were lower the previous three months, corn prices continued lower the following month 55% of the time. If you happened to read my three articles in August about applying Donchian rules to grains, you already know that trend is a valuable tool for trading grains, so you can imagine my confusion. Maybe, I thought, Antonacci's simple definition of momentum just wasn't a good method for corn. I almost gave up, but being part mule, I gave it one more shot. With the help of DTN's ProphetX software and my trusty Excel spreadsheet, I constructed a chart of hypothetical equity changes for spot corn prices from 1980 to July 2016, based on the same monthly data used in the scatter plot. The rule for this hypothetical trading plan was simple. If, at the end of each month, the price of spot corn was higher than it was three months earlier, the system would go long and stay long. Prices would be checked at the end of each subsequent month and the system would stay long if the previous three months still showed a gain or turn short if the previous three months showed a loss. The system was always in the market, either long or short. As I put the finishing touches to the spreadsheet and brought up the chart, I quickly saw a strong, upward trend of equity change that ended with a hypothetical profit of $9.92 a bushel, or $49,600, from trading one contract of corn 111 times over 37 1/2 years. The results did not include slippage or commission, but no matter how you look at it, they were a lot better than the dismal 45-cent gain that spot corn prices achieved on their own over the same 37 1/2 years. And the system's 50% maximum drawdown was far less than many of the deep dives that corn prices have taken that past four decades. As good as those final results were, I would strongly caution anyone about trying to trade Antonacci's momentum-based method for grains as there is plenty of volatility involved. More importantly, this weekend's research raises new points about markets that I had not considered before. In 1970, economist Eugene Fama of the University of Chicago wrote an article in the Journal of Finance which laid out the arguments for the efficient market hypothesis (EMH) -- work for which he shared the Nobel Prize in Economics in 2013. As one of Fama's supporters put it, the heart of EMH is the finding that "prices reflect available information."** Fama did not say that markets are perfectly efficient and he did not suggest that unpredictable crashes weren't possible. In fact, his work supported the notion that prices are unpredictable. Today, when people say that technical analysis is a waste of time, the root of the argument usually traces back to Fama's EMH. This weekend's research of corn prices, however, showed that two things -- once thought to be incompatible -- can both be true. Statistically speaking, there is no apparent correlation between the direction of spot corn prices the past three months and where they go the following month. It is also true that if we apply a simple trading rule based on corn's price direction over the past three months, we can show a hypothetical trading result that is far superior to a buy and hold strategy in corn. Thanks to this research, I have a new respect for the importance of time and trend -- two factors that release prices from their random disguises. I am glad to say that trend has long been a key part of DTN's Six Factors Market Strategies and, I suspect, will continue to stand the test of time. * Absolute Momentum: A Simple Rule-Based Strategy and Universal Trend-Following Overlay by Gary Antonacci, Portfolio Management Consultants, April 10, 2014. Mr. Antonacci has an MBA from Harvard Business School and his article is found at: http://bit.ly/… ** "Eugene F. Fama, efficient markets, and the Nobel Prize" by John H. Cochrane, May 20, 2014 at: http://bit.ly/… Todd Hultman can be reached at todd.hultman@dtn.com Follow Todd Hultman on Twitter @ToddHultman1(AG/ES)© Copyright 2016 DTN/The Progressive Farmer. All rights reserved.

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