The trend followers’ mantra – let winners run and cut losers short – is what causes many CTAs to exhibit the classic managed futures performance profile, full of small frequent losses and larger less frequent gains. And it’s why trend followers hate the dreaded “V-shaped” recovery. You see, the faster and sharper the reversal in a market trend, the more likely trend followers are to be stopped out for a loss.

Unfortunately, several markets that seemed to be on nice downtrends lately have exhibited V-shaped recoveries over the last few days, including the Nasdaq, Crude Oil, and Gold (although Gold is an odd “V” with its down leg much steeper than its up leg):

Disclaimer: past performance is not necessarily indicative of future results.

Meanwhile, other markets had a bit of a failed “V” before re-testing their lows and now rallying back up; leaving them a little more W-shaped:

Disclaimer: past performance is not necessarily indicative of future results.

The W-shaped recovery usually isn’t as unwelcome due to the way that many trend followers employ trailing stops based on moving averages. Even if the market isn’t continuing its decline, the longer it goes without a big move higher, the more time the moving average has to drop closer to the current price. So these W-shaped bounces – even if they represent the same total decline and climb as the V-shaped bounce – will tend to incur smaller losses or trim less off a manager’s open trading gains.

The bright side to all of this is that the Newedge CTA Index, which is trend-follower heavy, is indicating that April has been relatively kind thus far, with the index up 1.19% as of last Friday (although down –0.33% since its high levels of the month) (Disclaimer: past performance is not necessarily indicative of future results).