Archives for August 2024

31/08/2024 by Naomi

Welcome to “This Week in Trend”, where each week, we cover key movements and trends in the futures markets, offering insights on commodities and indices shaping the economy. From price surges to notable declines, we provide an overview of the factors driving these changes. Stay informed about the latest developments and navigate the market with confidence. Join us weekly to explore the dynamic world of futures trading and the trends that matter most.

“Navigating Through the Market Maze!”

Trend Barometer and SG Trend Index

This week, the Trend Barometer has decreased to 48, down from last week's 75, indicating a weakening in trending conditions. Despite this drop, the market environment remains favourable for some trend followers, though the recent fluctuation suggests that trends are becoming less pronounced.

As of August 29, the SG Trend Index shows a month-to-date (MTD) performance of -4.15%, with the year-to-date (YTD) performance standing at 1.66%. Given the mixed signals across various markets, it is likely that we will see significant dispersion in performance among trend followers this month. The image of a complex and intricate maze serves as a fitting metaphor for the current market environment, where traders must navigate through challenges and uncertainties. The specific universe traded by a trend follower may have a substantial impact on their performance, with some potentially benefiting more than others depending on their exposure to certain markets.

Despite the poor overall result for the month as reflected in the SG Trend Index, a number of trend followers have managed to find successful paths through the maze, posting significant recoveries following the extreme turbulence in equity markets at the beginning of the month. This resilience highlights the importance of maintaining a disciplined approach in the face of challenging conditions.

The continued challenges highlighted by the MTD performance indicate that trend-following strategies are currently navigating a complex and difficult market environment. Just like navigating through a maze, this underscores the need for increased vigilance and a cautious approach as the market environment remains challenging.

The Top Traders Unplugged (TTU) Trend Barometer is a proprietary tool that measures the percentage of markets with medium to strong trends. Just as a thermometer reading of 0 degrees Celsius equates to freezing, when the TTU Trend Barometer reads a value that is less than 40%, market trendiness begins to get “colder” or weaken. Likewise, when the TTU Trend Barometer gets above 55%, the environment gets “hotter” (better).

Weekly Asset Class Snapshot

Here's how different asset classes moved this week, with a few key highlights:

Volatility Index: -3.00%

The Volatility Index decreased by 3.00% this week, reflecting a reduction in market anxiety. This decline suggests that the markets have found some stability, though the lower volatility may also indicate less potential for significant price movements in the short term.

Grains: +3.57%

Grain prices rose by 3.57%, driven by concerns over weather conditions impacting crop yields. This significant increase reflects a tightening supply situation that has created upward pressure on prices.

Meats: +1.75%

Meats saw a moderate increase of 1.75%, supported by steady demand and minor supply chain disruptions. This uptick suggests a relatively stable market with no major shifts in the underlying dynamics.

Bond: -0.58%

Bonds experienced a slight decline of 0.58%, as investors continued to favour riskier assets amid a cautiously optimistic economic outlook. This small drop reflects ongoing investor confidence despite global uncertainties.

Energy: -1.97%

The energy sector fell by 1.97%, reflecting continued volatility in oil prices and concerns over global supply and demand dynamics. This decline highlights the ongoing challenges faced by the energy markets.

Metal: -1.39%

Metals decreased by 1.39%, as industrial demand showed signs of cooling off. This reduction suggests a potential consolidation phase in the metals market.

Soft Commodity: -0.62%

Soft commodities dipped by 0.62%, with mixed performance across different commodities. This decline indicates a potential pause in the bullish trends observed in previous weeks.

Equity Index: +0.61%

Equity indices gained 0.61%, continuing their recovery from earlier losses. This rise indicates a cautiously optimistic sentiment among investors, though the modest gain suggests some lingering uncertainties.

Currency: -0.31%

Currencies experienced a minor decline of 0.31%, influenced by mixed signals from central banks and global trade dynamics. This slight decrease reflects a more cautious currency market environment.

These movements illustrate a week of mixed conditions across asset classes, with grains showing a significant gain while energy and metals continue to struggle. For trend followers, this divergence underscores the importance of remaining adaptive and vigilant in identifying emerging trends.

Top 10 Bear and Bull Price Moves

Here's a detailed analysis of the key market movers for the week.

What’s Moving Up

Oats: +8.63%

Oats prices surged by 8.63% this week, driven by concerns over crop yields due to adverse weather conditions. Despite this strong upward move, it is unlikely that trend followers would be participating in this movement, as there is no clear sign that Oats is trending. The market has been in an extended congestion phase since July 5, 2024, making it difficult for trend-following strategies to gain traction in this environment.

Sugar: +5.71%

Sugar prices increased by 5.71% this week, fuelled by ongoing supply constraints in key producing regions. However, this sharp increase is an unfavourable move for trend followers who are likely short the trend since the peak in November 2023. The unexpected rise challenges their positions and disrupts the bearish trend they had been capitalizing on.

Canola: +5.15%

Canola saw a rise of 5.15% this week, recovering from recent declines as concerns over supply shortfalls emerged. However, this bullish move is another unfavourable development for trend followers who are likely short this trade since the peak in May 2022. The upward movement challenges their positions and disrupts the bearish trend they had been riding.

Wheat: +4.55%

Wheat prices climbed by 4.55% this week, driven by unfavourable weather conditions in major producing regions. However, this upward momentum is an unfavourable move for trend followers who have likely been short this trade since the peak in May 2022. The price increase challenges their bearish positions and disrupts the downtrend they have been capitalizing on.

Soybean Oil: +4.05%

Soybean oil saw an increase of 4.05% this week, supported by strong demand and tightening supplies. However, this upward move is likely to be viewed unfavourably by trend followers, who have been enjoying a strong short trend since April 2024. The market's renewed strength interrupts the bearish momentum they had been capitalizing on, challenging their positions in this trade.

What’s Moving Down

Orange Juice: -4.53%

Orange juice prices dropped by 4.53% this week as supply conditions improved slightly, easing earlier concerns. This sharp decline is another unfavourable move for trend followers who have been capitalizing on the significant bullish trend in this asset since 2022. The reversal challenges their long positions and disrupts the strong upward momentum they had been benefiting from.

Ethanol: -4.10%

Ethanol prices fell by 4.10% this week, reflecting weaker demand amid stable supply conditions. However, it is unlikely that this price move would have garnered much attention from trend followers, who are likely sitting on the sidelines, waiting to see if a material trend develops in this asset, either long or short.

Platinum: -3.61%

Platinum prices decreased by 3.61% this week, pressured by reduced industrial demand and a stronger U.S. dollar. However, this bearish move is unlikely to have drawn significant attention from trend followers, who are likely sitting patiently on the sidelines, waiting to see if a material trend will develop in this asset.

Silver: -3.31%

Silver saw a decline of 3.31% this week, following the trend in other precious metals as industrial demand softened. However, this move is unlikely to draw significant attention from trend followers, who are closely watching this asset to determine whether a bearish trend is imminent and if breakdowns short from this position will materialize.

VIX: -3.00%

The Volatility Index (VIX) dropped by 3.00% this week, reflecting a reduction in market volatility and investor anxiety. This decline comes as markets appear to be stabilizing after the recent turbulence, with some investors believing that the worst of the volatility may be behind us. However, the decrease in the VIX may also suggest fewer opportunities for large price movements in the near term, which could limit the potential for significant gains in the market.

Despite this drop, it's important to recognize that the current market environment remains complex. Some experts caution that the VIX's lower levels could be a temporary lull rather than a sustained period of calm. Historically, periods of reduced volatility have sometimes been followed by renewed spikes, especially if unexpected macroeconomic events or policy changes occur. This situation could lead to another round of heightened market fluctuations, particularly as we approach key economic decisions and political events later in the year (TalkMarkets, Blockworks, BlackRock).

Investors should remain vigilant, as the lower VIX might not fully capture the underlying risks still present in the market. While the current environment may seem more stable, it's crucial to stay prepared for potential shifts that could disrupt this apparent calm.

Conclusion

This week in trend following has highlighted the challenges and complexities of navigating a market filled with mixed signals. The dispersion in performance among trend followers is likely to be significant, as the varying market environments create divergent outcomes depending on the specific universe of markets traded. The theme of “Navigating Through the Market Maze” has never been more apt, with some trend followers finding paths to recovery while others are facing obstacles.

In particular, the grain complex has presented a difficult landscape for many trend followers. The sharp upward moves in grains like Oats, Sugar, Canola, Wheat, and Soybean Oil have proven unfavourable for those who have been short these markets, expecting the bearish trends to continue. These unexpected price increases have disrupted positions and challenged the bearish momentum that had been a source of gains in recent months.

Meanwhile, assets like Orange Juice and Silver, which had previously offered strong bullish or bearish trends, have shown signs of reversal or stagnation, adding to the difficulties faced by trend followers. The lower VIX, while indicating a reduction in volatility, may not fully capture the underlying risks, suggesting that the apparent calm could be deceptive.

In this environment, adaptability and vigilance remain crucial. Trend followers must continue to monitor the market closely, ready to adjust their strategies as new trends emerge or existing ones falter. The ability to navigate through this maze of market signals will be the key to success in the coming weeks.

List of Resources used in the Week in Review

Important Disclaimers

This document is directly solely to Accredited Investors, Qualified Eligible Participants, Qualified Clients and Qualified Purchasers. No investment decision should be made until prospective investors have read the detailed information in the fund offering documents of any manager mentioned in this document. This document is furnished on a confidential basis only for the use of the recipient and only for discussion purposes and is subject to amendment This document is neither advice nor a recommendation to enter into any transaction. This document is not an offer to buy or sell, nor a solicitation of an offer to buy or sell, any security or other financial instrument. This presentation is based on information obtained from sources that TopTradersUnplugged (“TTU”) (“considers to be reliable however, TTU makes no representation as to, and accepts no responsibility or liability for, the accuracy or completeness of the information. TTU has not independently verified third party manager or benchmark information, does not represent it as accurate, true or complete, makes no warranty, express or implied regarding it and shall not be liable for any losses, damages, costs or expenses relating to its adequacy, accuracy, truth, completeness or use.

All projections, valuations, and statistical analyses are provided to assist the recipient in the evaluation of the matters described herein. Such projections, valuations and analyses may be based on subjective assessments and assumptions and may use one among many alternative methodologies that produce different results accordingly, such projections, valuations and statistical analyses should not be viewed as facts and should not be relied upon as an accurate prediction of future events. There is no guarantee that any targeted performance will be achieved Commodity trading involves substantial risk of loss and may not be suitable for everyone

TTU is not and does not purport to be an advisor as to legal, taxation, accounting, financial or regulatory matters in any jurisdiction. The recipient should independently evaluate and judge the matters referred to herein. TTU does not provide advice or recommendations regarding an investor’s decision to allocate to funds or accounts managed by any manager (“or to maintain or sell investments in funds or accounts managed by any manager, and no fiduciary relationship under ERISA is created by the investor investing in funds or accounts managed by any manager, or through any communication between TTU and the investor

In reviewing this document, it should be understood that the past performance results of any asset class, or any investment or trading program set forth herein, are not necessarily indicative of any future results that may be achieved in connection with any transaction. Any persons subscribing for an investment must be able to bear the risks involved and must meet the suitability requirements relating to such investment. Some or all alternative investment programs discussed herein may not be suitable for certain investors This document is directed only to persons having professional experience in matters relating to investments. Any investment or investment activity to which this document relates is available only to such investment professionals. Persons who do not have professional experience in matters relating to investments should not rely upon this document.

This document and its contents are proprietary information of TTU and may not be reproduced or otherwise disseminated in whole or in part without TTU’s prior written consent.

This document contains simulated or hypothetical performance results that have certain inherent limitations AND SHOULD BE VIEWED FOR ILLUSTRATIVE PURPOSES. Unlike the results shown in an actual performance record, these results do not represent actual trading. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR INVESTMENT ACCOUNT.

ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM OR OTHER ASSET.

There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. No representation is being made that any investment will or is likely to achieve profits or losses similar to those being shown.

28/08/2024 by Naomi

When it comes to investing, most of us have heard the classic advice: “Buy low, sell high.” It's simple, easy to understand, and seems like a surefire way to make money. But there's another strategy that seems to turn this advice on its head – trend following. At first glance, it might seem strange. Why would anyone want to “buy high, sell low”? Let's dive into the logic behind this approach and why it might make sense.

Understanding Trend Following

Trend following is an investment strategy where traders buy assets that are going up in price and sell them when they start going down. Essentially, they follow the trend of the market. If the market is going up, they buy; if it’s going down, they sell. The idea is to make profits by riding the wave of market movements.

Why Buy High?

Imagine you're surfing. To catch a good wave, you don't paddle out and wait for a small ripple to turn into a giant wave. Instead, you look for a wave that's already forming and ride it. The same principle applies to trend following. When an asset's price is rising, it often continues to rise for a while due to momentum. By buying into a rising trend, trend followers aim to catch the wave and ride it to higher profits.

Why Sell Low?

Selling low might sound counterintuitive, but it's part of the strategy to cut losses and protect your gains. If an asset's price is falling, trend followers (if they are long) sell to avoid further losses. It's like jumping off a sinking ship. By getting out early, you minimize your losses and in order to keep your overall portfolio healthy.

Why It Works

Following Market Trends: Markets often have much larger price moves than most investors can imagine, referred to as “trends” due to investor behaviours, economic news, and other factors. Trend following takes advantage of these movements by going with the flow rather than against it.

Cutting Losses Short: One of the most important principles in trend following is to cut losses before they get too big. If a trend follower buys into a particular market and it starts to drop, they sell it to prevent a small loss from becoming a big one.

Letting Winners Run: Conversely, when an asset is going up, trend followers hold on to it as long as the trend continues. This means they benefit from extended upward movements.

The Psychology Behind Trend Following

Trend following also takes advantage of human psychology. When prices are rising, more people tend to buy, pushing prices even higher. This is called the “herd mentality” and reflects the “FOMO” Fear of Missing Out). Trend followers capitalize on this behaviour by joining the herd early, staying with the trend and aim to get out before the trend has reversed too much from its most recent high or low.

Real-World Example

Let's say you notice that the price of gold has been steadily increasing. A trend follower would see this upward trend and have predefined rules to buy gold, even though its price is higher than it was a few months ago. They continue to hold onto their gold as long as the price keeps going up. If the price starts to drop, indicating a potential trend reversal, they sell their gold to lock in their gains or avoid further losses, should the price go below their entry point.

Pros and Cons

Pros:

Simplicity: You don't need to predict the future, just follow current price action.
Reduced Emotional Stress: Decisions are based on predefined rules based on a market’s price action, not gut feelings.
Potential for Big Gains: If you catch a strong trend, the gains can be substantial.

Cons:

False Signals: Sometimes, trends can reverse quickly, leading to potential losses.
Frequent Trading: During certain, often non-trend periods, the strategy might require more trading activity, leading to higher transaction costs compared to the long-term.

Conclusion

While “buy high, sell low” might sound like bad advice at first, it's a key component of the trend following strategy. By buying into rising trends and selling into falling trends, trend followers aim to profit from market momentum, whilst protecting their investments through strict rules and robust risk management.

It's a different approach to investing that requires discipline, continuous risk management, as well as being deployed on a large set of diversified markets at the same time. So, the next time you hear someone talking about trend following, you'll understand the basic logic behind this seemingly counterintuitive strategy.

For more information about trend following, check out the free eBook “Ten Reasons to Add Trend Following to Your Portfolio” which gives an in-depth explanation of the benefits of this robust strategy.

Top Traders Unplugged, is a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.

26/08/2024 by Niels

Sticking with the System in Turbulent Times

July 2024 was a challenging month for trend followers, marked by reversals across various financial sectors and mixed results in commodities. The SG Trend Index posted a -2.41% return for the month, yet it remains up 6.07% year-to-date. This month's performance emphasizes the importance of adhering to disciplined strategies and resisting the urge to deviate based on short-term fluctuations.

The first quarter of 2024 showcased impressive gains, driven by clear, strong trends across stock indices, currencies, and certain commodities. However, the second quarter has presented significant obstacles, highlighting the volatile nature of trend following. This stark contrast between quarters underscores the necessity of sticking to well-defined strategies, even during turbulent times.

In July, the performance of trend-following strategies was hampered by volatility in currencies, fixed income, and stock indices. Losses were particularly notable in currencies. On the brighter side, a strengthening British pound provided some relief, trending upwards amid hopes of political stability in the United Kingdom.

Fixed income sectors also faced challenges, as global bond yields fell, impacting short positions in trend-following portfolios.

Stock indices experienced turbulence, particularly in the US tech sector and Japanese equities. Despite a positive performance from small caps and other regions, gains from long positions in India and certain US indices were insufficient to offset the broader declines seen in the Nasdaq and Japanese markets.

Commodities provided a mixed landscape. While gold longs, US natural gas shorts, and nickel shorts yielded profits, these were counterbalanced by losses in silver, copper, and oil. On a positive note, agriculture continued to be a strong performer year-to-date, with shorts in grains and cotton and longs in coffee contributing positively. This sector's performance illustrates the diversification benefits that agriculture brings to trend-following portfolios.

In these challenging times, it is crucial to emphasize the importance of “sticking with the system.” The recent market conditions serve as a reminder that trend following is a long-term strategy. The focus should not be on the performance of the last 100 trades but on the potential of the next thousand. The essence of successful trend following lies in maintaining discipline and avoiding the temptation to adjust strategies based on short-term results.

Effective trend-following strategies are designed to manage risk during periods of stagnation and drawdown while positioning traders to capitalize on emerging trends. By maintaining diversification and staying responsive to market signals, trend followers can navigate turbulent periods and prepare for future opportunities.

July 2024 Trend Index Performance
In July, the TTU Trend Following Index fell -2.73% bringing its year-to-date (YTD) result to 6.73%. The BTOP 50 Index mirrored this negative result for the month, falling by -1.58% and bringing the YTD result back to 5.35%. Likewise, the SG Trend Index fell by -2.41% posting a YTD result of 6.07%.

SG Trend Index

The SG Trend Index is designed to track the 10 largest trend following CTA’s of the managed futures space.

Criteria for inclusion in the Index as determined by Society Generale is as follows:
• Must trade primarily futures (including FX forwards);
• Must be broadly diversified across asset classes;
• Must be an industry recognized trend follower;
• Must exhibit significant correlation to trend following peers;
• Must be open the new investment; and
• Must report returns on a daily basis (net of fees).

The index currently is:
• Equally weighted;
• Calculated in base currency;
• Has an inception date of 1st January 2000;
• Rebalanced annually on 1st January; and
• Reconstituted annually on 1st January based on eligibility criteria.

There was a slight modification to the Index from January 2013 to the present. Previously the Programs needed to be a constituent of the SG CTA Index and the 10 largest Managers was not a requirement.

For the 2024 year following the rebalance of the Index we say goodbye to the Winton Trend Program and hello to the AQR Managed Futures Program. The listing of the 10 eligible programs in the Index for 2024 were as follows:

Table 1 – SG CTA Index 2024 Constituents

The performance of the SG Trend Index since 1st January 2000 to the end of last month is seen in Chart 2 below:

You will notice how the SG Trend Index is highly correlated with the BTOP50 Index and the TTU TF Index and uncorrelated with the S&P500TR Index.

Despite the high correlation between the various trend following Indexes, the long-term performance of these three Trend Following Indexes in terms of CAGR is different. The SG Trend Index plots between the BTOP50 Index and the TTU TF Index.

BTOP 50 Index

The BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regards to trading style and overall market exposure. Unlike the SG Trend Index and the TTU TF Index, the BTOP50 is not strictly a trend following Index and is more broadly representative of the entire managed futures segment of which a dominant style is trend following. We like to think of the BTOP 50 as a ‘quasi trend following Index’ as opposed to a pure trend following Index.

Like the SG Trend Index, the BTOP50 Index is designed to track the performance of the largest Programs by AUM, however the Programs included may not be all Trend Following Programs. Criteria for inclusion in the Index as determined by Barclay Hedge is as follows:

Criteria for inclusion in the Index as determined by BarclayHedge is as follows:
• Must be a Program represented in the Barclay CTA Universe;
• In each Calendar year, the Programs selected must in aggregate be no less than 50% of the investable assets of the Barclay CTA Universe;
• The Programs must be open for investment;
• The Manager must be willing to provide Barclay Hedge with daily return performance;
• The Program must have at least two years of trading activity; and
• The Program’s advisor must have at least three years of operating history.

The index currently is:
• Equally weighted;
• Rebalanced annually on 1st January; and
• Reconstituted annually on 1st January based on eligibility criteria.

Despite the ’50’ tag in the BTOP 50 description, for 2024 there were 20 constituents in the Index. For the 2024 year we say goodbye to CoreCommodity Management and Global Sigma Group, and say hello to DBi Managed Futures.

The performance of the BTOP 50 Index since 1st January 2000 to to the end of last month is seen in Chart 4 below:

The BTOP 50 Index is highly correlated with the trend following Indexes of the SG Trend Index and the TTU TF Index, however its long-term performance is the lowest of the 3 Trend Following Indexes. While there is a significant representation of Trend Following Programs within the Index, the non-trend following Programs contribute to this diluted long-term performance.

TTU TF Index

The TTU TF Index has been developed by Top Traders Unplugged to provide a performance measure of the trend following programs with a long-term track record.

At TTU, we recognise the importance of a robust trading approach to these uncertain markets and feel that AUM is not a good robustness measure when it comes to assessing performance of the Trend Following industry. It is our strong opinion that the ultimate selection measure to apply in constituting a Trend Following Index is not AUM or a proxy risk metric such as the Sharpe, Sortino, MAR ratio, Ulcer Index or Serenity ratio. The superior metric to assess long-term performance is the long-term validated track record itself.

We have therefore developed a different method for constructing our TTU TF Index. The criteria for inclusion into our Index is as follows:

The criteria for inclusion into the TTU TF Index is as follows:
• Monthly performance results need to be captured in the Nilsson Hedge CTA database;
• Must be geographically diversified across asset classes;
• Must be fully systematic in nature using quantitative rules for entry and exit;
• Must possess at least a 15-year unbroken track record to the current reporting month;
• Must adopt trend following as their dominant investment strategy;
• Are currently active programs; and
• Must report performance monthly (net of fees).

The Index:
• Is Equally weighted;
• Is Rebalanced monthly;
• Is Reconstituted monthly;
• Has an inception date of 1st January 2000

As of July 31, 2024, at the time this report was written, the TTU TF Index draws its results from 47 Active Programs. The Index's monthly return is calculated based on the average return of these Programs that have submitted their reports for the month. Out of a total of 47 active Programs, 43 have provided their monthly reports. The table below details the 10 Programs that are still pending submission of their reports as of the reporting date.

Table 5: Programs highlighted in yellow in the Table above have not currently reported for the month.

The performance of the TTU TF Index since 1st January 2000 to to to the end of last month is as follows:

For the month of July, the TTU TF Index produced a return of -2.73% which brings the YTD result to 6.73%.

Now you might be intrigued by the performance result of the TTU TF Index. While it is highly correlated with the BTOP 50 Index and the SG Trend Index, we can see that long term performance of the TTU TF Index clearly outstrips alternative Index measures.

The dominant contributor of this outperformance is the requirement for any participating Program in the Index to have a long-term track record. You see, using AUM as a criterion for inclusion is not necessarily a useful selection criterion. While AUM reflects ‘market appeal’, it does not imply that this ‘market appeal’ is strongly correlated with ‘long term performance’.

Our process of Index construction gives us an insight into how any diversified ensemble of trend following Programs with a long-term track record approaches an optimal portfolio as we increase the number of Programs in the Index. Simply by diversifying into a large ensemble of Trend Following Programs with a long-term track record, we magically improve the Index result. CAGR is increased and our drawdowns are reduced.

Of course, we already know this ‘diversification’ principle of Trend Following. As we increase our diversification efforts, we obtain improvement both in terms of the maximum drawdown and in the CAGR generated by the ensemble. This is why we seek to strive for maximum market and system diversification within our individual programs. The TTU TF Index just takes this diversification one step further and diversifies across many different TF Programs to deliver a superior risk-adjusted result.

TTU TF Index Performance

From January 1, 2000, to July 31, 2024, the TTU Trend Following Index achieved an impressive Compound Annual Growth Rate (CAGR) of 8.01% and experienced a Maximum Drawdown of 17.13% (see Chart 6 above). In comparison, the S&P 500 Total Return Index, which includes dividends, posted a CAGR of 7.45% but faced a much higher and steeper Maximum Drawdown of 50.95% over the same period (refer to the chart below).

TTU Trend Barometer

The TTU Trend Barometer significantly increased from 20 in June to 48 in July, highlighting improving trending conditions. It’s important to remember that the Barometer reflects month-end conditions, which may not fully represent intra-month performance. Additionally, the Barometer can be influenced by short-term models, which might differ from the medium to long-term trend-following models preferred by the trend-following community.

The Trend Barometer is a proprietary tool we use at TTU to assess the trend strength of a diversified portfolio consisting of 44 markets across all sectors. We firstly subdivide the trend strength of each market of a hypothetical diverse portfolio into five ranges from strong up, medium up, neutral, medium down and strong down. We then aggregate these results into a single portfolio number which we use to describe the overall trend strength across a hypothetical Program portfolio.

We then arbitrarily divide this percentage range into 3 where a value of 0-30 is considered a very unfavorable market regime for trend following Programs, a range between 30 to 55 is a somewhat neutral environment for Trend Following Programs (but not an environment where you could expect consistent performance) and values more than 55 are considered to be a favorable regime towards Trend Following Programs, where they should see good performance.

Aside from the occasional dispersed readings when compared to overall trend following performance this method is surprisingly powerful in describing CTA monthly performance and can be used to connect market trading environments to resultant Manager performance.

The Macro Environment

For a blow-by-blow macro wrap for the month, we recommend you listen to our weekly systematic investor series by clicking on the links below. It is also worthwhile listening to our past catalogue as it provides you with an understanding of how these markets can shape the emotions of a Trader and why it is therefore essential that Trend Followers adopt systematic rules-based processes to keep these emotions in check.

You can find all of our weekly conversations by clicking this link.

Top Traders Unplugged Trend Following Program (TTU TF Program)

You may have noticed that in the Systematic Investor Series I have have in the past mentioned my proprietary system which I traded before joining DUNN Capital Management. I have taken my listeners under the hood to better understand the thinking behind the design process of this trend following model in the following episodes:

The TTU Trend Following Program is also a kind of experiment for me, as I decided not to make any changes to the design or parameters in the program since about 2013, to see how a medium-term trend following strategy would perform without any new research and improvements.

We have continued to track the performance of this trend following model on an ‘after fee’ NAV basis simply to provide a context for my listeners to understand how the performance of this classic trend following model (albeit not as long-term as others) performs against other, perhaps more recent Trend Following Programs whose methods have ‘drifted’ away from the traditional Trend Following roots.

Despite a difficult drawdown period between May 2015 to Feb 2019, the TTU Trend Following model continues to perform during market regimes that are more volatile and uncertain, although in 2022, its shorter-term models (Group 3), have had a difficult time.

In July 2024, the TTU Trend Following Program experienced a decline of -4.06%, bringing its total for the year to a loss of -4.48%. For an in-depth analysis, please see Chart 9 and Table 10.

Table 10 – TTU TF Program Monthly Returns

Top 10 Lists

We have prepared the following Top 10 lists (excluding non-reporting Programs) for various performance categories based on monthly performance returns for a 15-year period commencing 1st January 2009 to the current month.

Top 10 Listing – by Compound Annual Growth Rate

Chart 12– Top 10 Program Performance by Compound Annual Growth Rate

Top 10 Listing – by Risk Adjusted Return (Serenity Ratio)

Table 13: Top 10 based on Serenity Ratio

Chart 14 – Top 10 Program Performance by Serenity Ratio

Top 10 Listing – by Last 12 months Performance

Table 15: Top 10 based on Last 12 Months Performance

Chart 16 – Top 10 Program Performance by Last 12 Months Performance

Performance Results for the TTU Top 5 by Serenity Ratio

In a recent research project, we undertook at TTU, we examined three different allocation methods that could be deployed by an investor seeking to optimally allocate investment funds towards 5 of the Top ranked Globally Diversified Systematic Trend Following Programs with a long-term track record.

These three methods adopted 3 different forms of performance metric, namely:

Top 5 Performers by Compound Annual Growth Rate (CAGR) using a rolling lookback of 15 years.
Top 5 Performers by MAR ratio (CAGR/Max Draw%) using a rolling lookback of 15 years.
Top 5 Performers by Serenity Ratio using a rolling lookback of 15 years.

The findings of our project can be obtained by clicking on this link.

Our research determined that the optimal selection method was the Serenity Ratio method.

The Performance for the month of July 2024 of our Top 5 Selection Method using the Serenity Ratio was a decrease of -4.98%. (Refer to Chart 21). With the inclusion of Mulvaney Capital’s Program in the Serenity Index this year, we are getting the benefit of strong growth so far in 2024 but also its more volatile signature.

For the entire reporting period, this selection method produces a CAGR of 5.65% with a Maximum Drawdown of only 14.44% and effectively a “zero” correlation to the S&P500TR Index (-0.05).

Chart 17 – Performance Results of the Top 5 Allocation Method (Serenity Ratio)

We mentioned in our recent podcast on the Systematic Investor Series Episode 283 that the Serenity selection for 2024 would be announced in this monthly report. So without further ado, having updated our data sets with results from 2023, the 2024 Serenity selection is as follows:

This selection will be applied for the investment period between 1st February 2024 to 31st January 2025:

Man AHL: AHL Evolution;
Man AHL: AHL Aplha;
Quantica Capital AG: Managed Futures Program;
Man AHL: AHL Dimension; and
Mulvaney Capital Management: Global Diversified Program.

Individual Performance Results for these 5 Programs used for the Serenity allocation as of 31 July 2024 using the 2024 listing are as follows:

Chart 18 – Performance Results MAN AHL: AHL Evolution

Chart 19 – Performance Results MAN AHL: AHL Alpha

Chart 20 – Performance Results Quantica Capital: Managed Futures Program

Chart 21 – Performance Results Man AHL: AHL Dimension

Chart 22 – Performance Results Mulvaney Capital Management: Global Diversified Program

Performance Results for the Alternative 60/40 portfolio using the TTU Top 5 by Serenity Ratio

In our “How to Invest with the Best” blog post, we also highlighted the significant improved risk-adjusted performance results that could be achieved by replacing the 40% allocation to Bonds in the traditional 60/40 portfolio with an allocation of 40% towards the TTU Top 5 by Serenity ratio.

The evaluation compared the performance of a traditional 60% Equity/40% Bond portfolio against a 60% Equity/40% Serenity portfolio to highlight the uncorrelated historical nature of this Alternative 60/40 portfolio and demonstrate the benefits that a sizeable allocation towards the Serenity portfolio would bring to an investor if equity and bond markets go back to their historic relationship and become more positively correlated in the future. There is no guarantee that correlations remain static over time and it is possible that bond markets and equity markets may lose their uncorrelated relationship that has existed in the last 20 years or so. It is far less likely that the TF managers within the Serenity Grouping will ever be strongly positively correlated to the Equities market, over the long run, given the extensive global diversification and ability to go long and short, that is present within the constituents of the Serenity Grouping.

Chart 23 below showcases the comparative performance results for the period 1 January 2000 to the end of last month:

A 100% investment in the S&P500TR portfolio;
A 100% investment in the VBMFX which is a proxy for the bond market;
A 100% investment in the VBIAX which is a suitable proxy for the classic 60% Equity/40% Bond portfolio;
A 100% investment in a 60% S&P500TR 40% Serenity portfolio; and
A 100% investment in the Serenity Portfolio.

Chart 23 – Comparative Performance Results of Various Portfolio Allocations

The comparison of alternative portfolio allocations above highlights the strong historic risk adjusted returns that have been enjoyed by 60% S&P500TR / 40% Serenity Composite Portfolio.

A more detailed assessment of this powerful 60/40 investment option is reflected below.

Chart 24 – Performance Results for the 60% S&P500TR/ 40% Serenity Composite

Important Disclaimers

This document and its contents are proprietary information of TTU and may not be reproduced or otherwise disseminated in whole or in part without TTU’s prior written consent.

25/08/2024 by Betsy McDowell

The electric vehicle revolution is driving a surge in demand for lithium, but traditional mining methods raise serious environmental concerns.
Innovative approaches are emerging to diversify lithium sources and minimize environmental impact.
Ernest Scheyder shares insights about lithium mining and the potential benefits and challenges of alternatives to lithium mining.

When we think about powering the future with clean energy, images of sleek electric vehicles and sprawling solar farms often come to mind. But behind these symbols of a sustainable future lies a critical, and often overlooked, element: lithium. This lightweight metal is the key ingredient in rechargeable batteries that power everything from smartphones to electric grids, making it indispensable for the global transition to renewable energy.

But as the demand for lithium skyrockets, so do concerns about the environmental footprint of its extraction. Traditional lithium mining, with its massive open pits, vast water consumption, and potential for habitat destruction, has many wondering: is swapping gasoline for batteries truly a win for the planet?

“As we think about where we want to go green and how we're going to go green,” says award-winning journalist Ernest Scheyder, “I think these [supply chain and environmental concerns] have to be part of the collective discussions.”

Ernest has spent years immersed in this complex world and is currently a senior correspondent at Reuters. His book, “The War Below,” chronicles the global battle for critical minerals like lithium, pulling back the curtain on the often contentious struggle between economic needs and environmental concerns.

However, Ernest's work also reveals a glimmer of hope in the form of alternative lithium extraction methods — technologies that promise to minimize environmental damage without compromising production. “There's no free lunch,” says Ernest, succinctly capturing the inherent trade-offs involved in any large-scale resource extraction. But the quest for cleaner lithium is gaining momentum.

Kevin Coldiron and I invited Ernest to Top Traders Unplugged for a thought-provoking conversation about the challenges and opportunities of lithium extraction in the age of clean energy. We talked about new technologies, environmental concerns, the role of indigenous communities, and the future of a sustainable lithium supply chain.

Here are a few highlights from our conversation on the alternatives to lithium mining and their potential benefits and challenges.

Alternatives to conventional lithium mining

Direct lithium extraction

Imagine a giant, high-tech water filter selectively extracting lithium ions from underground brine reservoirs — that's essentially what Direct Lithium Extraction (DLE) aims to achieve. This innovative method bypasses the need for large, open-pit mines and sprawling evaporation ponds, offering a potentially more sustainable approach to lithium extraction.

Instead of relying on solar evaporation, DLE uses specialized absorbent materials or membranes to capture lithium from brines pumped to the surface. This process has several key advantages:

DLE significantly reduces water usage compared to traditional evaporation ponds, a critical consideration in arid regions where lithium-rich brines are often found.
DLE requires a much smaller surface footprint than conventional mining, minimizing habitat destruction and visual impact.
By eliminating the lengthy evaporation process, DLE has the potential to shorten production times, allowing for a quicker response to growing lithium demand.

However, Ernest cautions against viewing DLE as a silver bullet. “As of today,” he says, “no direct lithium extraction technology has worked yet at commercial scale without the use of those evaporation ponds.”

The challenges, as Ernest highlights, are multifaceted. Firstly, the brines, often found at temperatures exceeding 400 degrees Fahrenheit, are incredibly corrosive. “Just that super hot brine,” Ernest recounts, “one scientist I talked to for the book called it ‘a nasty mix of a soup.'” Such extreme conditions demand specialized materials and engineering designs to ensure equipment durability.

Secondly, the complex chemical composition of brines poses a hurdle. Selectively extracting lithium without capturing other unwanted elements requires sophisticated filtration techniques. This is still an active area of research and development.

Despite these hurdles, several companies are pursuing DLE technology. Ernest notes that giants like Berkshire Hathaway, ExxonMobil, and Albemarle are all investing in this area, driven by the promise of tapping into new lithium resources and contributing to a more sustainable future.

“If it [DLE] could be made to work,” he says, “it could unlock vast supplies of lithium across the world.” However, Ernest emphasizes the importance of a realistic outlook. The potential is undoubtedly there, but the path to widespread commercialization is still paved with technical challenges.

Enhanced brine extraction with reduced environmental impact

While DLE offers a potentially revolutionary approach, researchers and companies are also exploring ways to improve the efficiency and sustainability of conventional brine extraction methods. These innovations aim to reduce the reliance on large, open-air evaporation ponds, which, as Ernest points out, have come under scrutiny for their high water consumption, especially in already arid regions. “You're basically taking a water source out of the ground in a very arid climate,” Ernest explains, “so that doesn't necessarily endear [the companies] to the local community.”

One promising avenue involves the use of specialized membranes and absorbent materials to selectively extract lithium from brines. These technologies allow for a more targeted and efficient extraction process, potentially minimizing the need for vast evaporation ponds. Ernest, in our conversation, highlighted the ongoing research in this field, noting the potential for these advancements to significantly reduce water usage and waste generation. He also emphasized the industry's awareness of the need for more sustainable practices: “Increasingly you start to see some mining companies, when they build processing facilities, they are building in recycling plans for 10, 20, 30 percent of the production.”

Another area of innovation focuses on optimizing the evaporation process itself. Researchers are exploring techniques to enhance evaporation rates while minimizing water loss and land disturbance. This could involve using covered evaporation ponds to reduce water loss through evaporation, or exploring new materials that enhance lithium concentration in the brine, shortening the overall processing time.

Some companies are even experimenting with closed-loop systems for brine extraction. These systems aim to recycle the water used in the extraction process, minimizing overall water consumption and reducing the discharge of potentially contaminated wastewater. Ernest points out that this aligns with the broader push for a circular economy in the industry, where “old electronics can be completely recycled and then used to make new ones, so we don't have to have mining anymore.”

While these enhanced brine extraction methods may not be as radical as DLE, they offer a more incremental path towards a more sustainable lithium supply chain. By improving the efficiency and reducing the environmental footprint of existing techniques, these innovations can play a significant role in meeting the growing demand for lithium while mitigating its impact on water resources and fragile ecosystems.

Lithium extraction from clay deposits

While brine extraction methods dominate the current lithium landscape, a relatively new source is gaining attention: clay deposits. These vast clay deposits, particularly in the United States, are now being eyed as a potentially more sustainable source of lithium.

“Another region in the United States that's got a lot of lithium is the Smackover Formation,” Ernest explained during our conversation, “which is an underground reservoir that goes from parts of Texas, through Louisiana, through Arkansas into parts of Mississippi and Southern Florida.” These clay deposits, formed over millions of years, contain lithium trapped within their mineral structure.

Extracting lithium from clay offers several potential environmental advantages compared to traditional hard-rock mining or brine extraction. Firstly, it can be less invasive. Unlike conventional methods that require digging massive open pits, clay-based extraction can involve smaller surface footprints, minimizing habitat disruption and visual impact.

Secondly, while the exact water requirements depend on the specific extraction technology used, clay deposits generally require less water than brine extraction methods, especially those relying on large evaporation ponds.

Finally, clay-based extraction could potentially tap into previously uneconomical lithium resources. As Ernest noted, “It had been a huge oil-producing region for a long time. It's got a lot of brine there still in these underground reservoirs … but they also contain a lot of lithium.”

This opens up the possibility of co-extracting lithium alongside oil and gas production, making use of existing infrastructure and potentially reducing the overall environmental impact.

However, extracting lithium from clay is not without its challenges. Developing efficient and cost-effective technologies to liberate the lithium from the clay matrix is a key area of research and development. Additionally, the processing of clay-based lithium resources may require different approaches compared to traditional sources, requiring further innovation and investment.

Despite these challenges, the potential of clay deposits as a more sustainable lithium source has attracted considerable interest. Several companies and research institutions are actively exploring and developing clay-based extraction technologies, driven by the need to diversify lithium sources and reduce the environmental impact of this critical mineral.

Charting a sustainable course for lithium

While conventional lithium mining has raised valid concerns about its environmental impact, the exploration of alternative extraction methods offers a glimmer of hope. DLE, with its promise of reduced water consumption and land disturbance, represents a potential paradigm shift.

Meanwhile, advancements in brine processing techniques offer a more incremental yet impactful approach to minimizing the footprint of existing operations. And the emergence of clay deposits as a viable lithium source opens up exciting possibilities for diversifying supply and reducing reliance on more environmentally intensive methods. The path forward requires a collective effort, embracing innovation, responsible practices, and informed decision-making.

This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.

24/08/2024 by Naomi

“Rebound in the Winds of Change!”

Trend Barometer and SG Trend Index

This week, the Trend Barometer has risen to 70, up from last week's 45, indicating a significant improvement in trending conditions. This shift suggests that the market environment is becoming more favourable for trend followers, following the significant volatility earlier in the month. The 10-day rate of change is stabilizing, reflecting the resumption of trends that were previously disrupted.

As of August 22, the SG Trend Index shows a month-to-date (MTD) performance of -3.55%. This is an improvement compared to last week's MTD result of -4.42% as of August 15. Although the index remains in negative territory, the reduction in losses signals that trend-following strategies are beginning to benefit from the market's return to more stable conditions. The early month's volatility created challenges, but medium to long-term trend followers are now starting to see the benefits of staying the course, with several earlier trends resuming.

The improvement in the MTD performance might indicate that some trend-following strategies are beginning to stabilize or recover from the initial shocks earlier in the month. However, the continued negative reading reflects that the market environment remains difficult, with trends potentially being short-lived or less pronounced. For trend followers, this ongoing volatility and challenging conditions underscore the need for caution and adaptability in their strategies.

Weekly Asset Class Snapshot

Here's how different asset classes moved this week, with a few key highlights:

Volatility Index: +2.98%
The Volatility Index rebounded by 2.98% this week, reflecting a slight uptick in market anxiety. This increase suggests that while markets have stabilized somewhat, there remains underlying uncertainty that could trigger more significant movements in the future.
Grains: +1.23%
Grain prices edged up by 1.23%, likely due to ongoing concerns about weather conditions impacting crop yields. This modest increase signals a mixed environment, where supply concerns are balanced by stable demand.
Meats: +1.68%
Meats saw a moderate increase of 1.68%, driven by supply chain adjustments and demand fluctuations. This rise suggests a strengthening market, potentially driven by seasonal factors and export demand.
Bond: +0.50%
Bonds moved up slightly by 0.50%, indicating continued investor interest in safer assets amid global economic uncertainties. The small gain reflects a cautious approach by investors.
Energy: -2.41%
The energy sector experienced a significant decline of 2.41%, reflecting ongoing volatility in oil prices and concerns over global supply and demand dynamics. This drop highlights the challenges faced by the energy markets in maintaining stability.
Metal: +1.42%
Metals increased by 1.42%, showing continued strength driven by industrial demand and safe haven buying. This uptick signals a potential emerging trend in the metals market.
Soft Commodity: +3.97%
Soft commodities saw a substantial rise of 3.97%, with key contributors like cocoa and orange juice leading the charge. This increase reflects ongoing supply constraints and robust demand.
Equity Index: +1.62%
Equity indices gained 1.62%, continuing the recovery from earlier losses. This rise is indicative of improving investor sentiment and a return to risk-on behaviour.
Currency: +1.56%
Currencies experienced a notable gain of 1.56%, influenced by central bank actions and shifts in global trade dynamics. This increase suggests a more volatile currency market environment.

These movements illustrate a week of improving conditions across most asset classes, with energy being the significant outlier. For trend followers, the divergence between these asset classes highlights the importance of remaining adaptive and vigilant in identifying emerging trends.

Top 10 Bear and Bull Price Moves

Here's a detailed analysis of the key market movers for the week.

What’s Moving Up

Cocoa: +10.85%

Cocoa prices surged by 10.85% this week, driven by concerns over supply shortages due to adverse weather conditions in West Africa, a key producing region. The ongoing dry spell has heightened fears of reduced yields, leading to a strong bullish trend. Although Cocoa has been in a congestion pattern, trend followers may now see this significant upward move as the potential commencement of a bullish breakout from this pattern. This development is likely drawing increased attention from traders, who are closely monitoring the market for confirmation that this could be the start of a new sustained trend.

Orange Juice: +9.25%

Orange juice prices jumped by 9.25% this week, continuing its impressive upward trajectory. Many trend followers have been capitalizing on this massive bullish outlier that began in early 2022. Persistent supply chain disruptions and weather-related issues in major producing regions like Florida and Brazil have driven prices to a historic high. The market's bullish sentiment is bolstered by fears of long-term supply constraints, making this trend even more favorable for those who have been long in the market.

Lean Hogs: +7.33%

Lean hogs climbed by 7.33% this week, driven by strong demand in both domestic and export markets, particularly from China. The ongoing recovery in the global economy has boosted meat consumption, contributing to this bullish trend. However, this move is likely viewed unfavourably by trend followers, who have been short in Lean Hogs since its recent high in April 2024. The sudden upward momentum may have caught many off guard, challenging their positions in this market.

Cotton: +5.26%

Cotton prices increased by 5.26% this week, driven by concerns over potential production shortfalls due to adverse weather conditions in the U.S. and India. However, this upward move is likely viewed unfavourably by trend followers, who have been short in this market since its high in March 2024. The sudden rise in prices challenges their positions, as the market's reaction to these supply concerns interrupts the bearish trend they had been capitalizing on.

Soybean Oil: +4.40%

Soybean oil saw a rise of 4.40% this week, recovering from recent declines as demand picked up and supply concerns emerged. However, this upward move would likely be viewed unfavourably by trend followers, who have been enjoying a strong short trend since April 2024. The market's renewed strength interrupts the bearish momentum they had been capitalizing on, challenging their positions in this market.

What’s Moving Down

Natural Gas: -11.05%

Natural gas prices plummeted by 11.05% this week, driven by a combination of oversupply and weaker-than-expected demand. The mild summer temperatures in key regions have reduced the need for cooling, leading to a sharp drop in prices. However, Natural Gas has been in a congestion phase since February 2023, making this decline a potential precursor to a significant move. Trend followers are likely watching closely for signs of an imminent breakout.

Lumber: -4.52%

Lumber prices fell by 4.52% this week, continuing a downward trend fuelled by weakening demand in the housing market. The recent interest rate hikes have dampened home construction, leading to reduced demand for lumber. For trend followers who may have been long since the recent low in July 2023, this move would have been unfavourable. However, most trend followers with medium to long-term models are unlikely to be participating in Lumber, given the market's volatility and lack of clear long-term direction.

Wheat: -4.20%

Wheat prices declined by 4.20% this week, pressured by favourable weather conditions in major producing regions, which have improved the crop outlook. This move would have been viewed favourably by medium to long-term trend followers, who have likely been short this market since its high in May 2022. The continued bearish sentiment, driven by strong supply expectations, reinforces the downtrend, providing further opportunities for those positioned short.

USD: -1.70%

The U.S. Dollar (USD) dropped by 1.70% this week, as investors shifted away from the greenback amid improving global economic conditions and a move towards riskier assets. This bearish price move may be encouraging trend followers to enter the trade, as it could signal the end of a protracted period of congestion since February 2023. The weakening dollar reflects a broader trend of reduced demand for safe-haven currencies, which could gain momentum if the global economic recovery continues.

Live Cattle: -1.53%

Live cattle prices decreased by 1.53% this week, reflecting softer demand and stable supply conditions. Although the market shows a bearish trend, it is unlikely that trend followers are participating in this move, as there is no clear indication that the period of congestion since September 2023 is over. The ongoing uncertainties in the meatpacking industry and fluctuating consumer demand continue to create a challenging environment for establishing a definitive trend.

Conclusion

This week’s market movements underscore the importance of adaptability and vigilance in the ever-changing landscape of futures trading. With the Trend Barometer quickly rising and the SG Trend Index showing signs of recovery, there are indications that the challenging conditions of earlier this month are giving way to more stable trending opportunities. However, the markets remain nuanced, with some sectors showing clear directional trends while others linger in congestion or experience sudden reversals.

For trend followers, the key to navigating this environment lies in recognizing when a pattern is breaking out or when to remain on the sidelines. This week’s significant moves in commodities like Cocoa and Orange Juice highlight the potential for new opportunities, while the continued congestion in markets like Natural Gas and Live Cattle serves as a reminder to exercise caution.

As we look ahead, maintaining a flexible approach will be crucial. The ability to swiftly adjust strategies in response to emerging trends or unexpected market shifts will be the defining factor for success in the weeks to come.

Stay tuned as we continue to monitor these developments, providing you with the insights needed to stay ahead in the dynamic world of futures trading.

List of Resources used in the Week in Review

Important Disclaimers

This document and its contents are proprietary information of TTU and may not be reproduced or otherwise disseminated in whole or in part without TTU’s prior written consent.

17/08/2024 by Betsy McDowell

The potential return of Donald Trump to the U.S. presidency could lead to significant volatility in global markets, particularly through aggressive economic policies that export inflation and impact emerging economies.
Meanwhile, European countries might need to reassess their defense and economic strategies due to possible shifts in U.S. foreign policy and the implications of a less independent Federal Reserve under Trump. Alfonso “MacroAlf” Peccatiello says investors should seek strategies to navigate the uncertainties and risks associated with a potential Trump presidency and its economic implications.
What are the potential risks and opportunities of Trumponomics? Would a second term usher in a new era of global market volatility?

Our world has never been more connected and interdependent. The implications of significant political shifts, especially in major economies like the United States, have reverberating effects throughout the global geopolitical landscape. Recently, the U.S. Supreme Court issued a decision that extended broad immunity to presidents, including former ones, from criminal prosecution for actions taken while in office.

That decision, along with incumbent President Biden’s lackluster debate performance, sparked discussions about the possible return of former President Donald Trump to power. And of course, such a possibility raises questions about the impact of a second Trump term on the U.S. and global markets.

“The U.S. is the reserve currency of the world … and T-bills are the most used collateral in any type of leveraged transaction at any level,” says Alfonso Peccatiello (also known as “MacroAlf” on social media), founder of The Macro Compass. “And the repo market in the U.S. is the biggest in the world because we know the US policymakers normally play by certain rules.”

Those “rules” — some legislative, some just “norms” — are what sets the U.S. apart from autocracies, like the rule of law and “a bunch of stuff we take for granted by now,” Alf adds. “And this is one of the reasons why we have managed to build a gigantic leveraged system around the dollar and dollar collateral. That’s why it works.”

However, if we “start shattering the foundations of that, the story is very different,” he says. (Cue concerns about Trump 2.0 from even the most fiscally conservative among us.)

Alf joined me and Cem Karsan for a Global Macro Edition of Top Traders Unplugged to break down today’s challenging macroeconomic environment — crushing levels of debt, skyrocketing wealth inequality, polarized electorates, disruptive technologies like AI, rising interest rates and inflation — and what impact a Trump presidency could have on the global economy.

From the Supreme Court to global markets

It’s not hyperbole to imagine that the Supreme Court’s decision on presidential immunity will transform the political landscape in the United States. This decision would undoubtedly give Trump, if elected, more power than he had during his previous term. This power dynamic could enable him to implement policies with a greater degree of control, which could lead to volatility in global markets — especially if the GOP wins majorities in both houses of Congress.

Cem notes that this scenario bears resemblance to the economic turbulence of the 1960s and 1970s, in which the U.S. inadvertently exported inflation and economic instability to other parts of the world through assertive power politics.

“In the 60s, there was this growing generational divide,” Cem explains. “There was populist rhetoric and … with JFK’s assassination, it led to a release of policy, which is what LBJ did. He took that sentiment and passed the Great Society program here in the United States. Some people will still point to the Great Society program and say it was an incredible piece of legislation… but it released this populist push.”

He adds that populism led to protectionism, the emergence of the Cold War and eventually a hot war in Vietnam — which led to more protectionism and the OPEC crisis of the late ‘70s.

‘Power politics’

One of Cem’s key concerns is how a Trump presidency could influence the U.S. relationship with the rest of the world. Because Trump will likely “exert a lot more influence than he did last time around,” Cem thinks that the former president’s “power politics” might lead to “considerably more disconnect between the United States and emerging markets, allow the U.S. to export some of this inflation to tax the rest of the world, even though [inflation] is a structural global phenomenon … and cause significant volatility.”

The implications of such a policy approach could be far-reaching, affecting currency values, trade balances, and overall economic stability in emerging market economies.

Cem wonders if Trump might “export some of these problems through pure power politics.”

He thinks Trump is “willing to do that and will likely try his best to do that,” volatility be damned.

“But I do think that makes for interesting macro trades and an incredible opportunity,” he adds. “You don’t necessarily have to get that trade right in the direction, but you can get it right in the form of the distribution of volatility.”

The Euro factor

Cem argues that the impact of a Trump presidency would not be limited to the U.S. and emerging markets; it would also have significant repercussions for Europe.

“Because Europe acts as an ancillary to NATO and the United States … Trump might have some different ideas about … the role that the U.S. wants to play” in the realm of foreign policy,” he says.

The potential shift in U.S. foreign policy, particularly concerning defense spending and NATO, could force European countries to reevaluate their defense strategies and budgets. Unlike the U.S., European nations are more vulnerable to economic shocks.

“European countries …. are somehow fiscally sovereign, but to a certain extent they are not monetarily sovereign per se,” he explains.

The U.S., as the issuer of the world’s reserve currency, has greater flexibility in managing economic policies, whereas European countries face constraints due to their reliance on a shared currency and economic policies dictated by the European Union.

Trumponomics?

The potential for a Trump presidency to introduce policies that could destabilize global markets cannot be ignored. The U.S. dollar’s role as the world’s reserve currency means that any significant policy shifts in the U.S. can have ripple effects across the globe.

“There is a structural demand for the dollar because of the euro/dollar system and how we have created the world around the dollar,” Alf observes. “The U.S. can afford a lot more from that perspective, but places like Europe or the U.K. cannot … We have limitations by architecture, basically.”

For example, a more aggressive approach to trade and tariffs could impact global supply chains, leading to increased costs and disruptions in various industries. Similarly, changes in U.S. monetary policy — such as the potential for a less independent Federal Reserve under a Trump administration — could lead to increased market uncertainty.

Cem is concerned about the possibility of Trump adopting economic policies similar to those seen in emerging markets, like appointing loyalists to key financial positions or manipulating monetary policy for political gain.

“You hear about Erdoganonomics, right? I think there’s a Trumponomics that’s going to be akin, but scarier. It’s with the power of the reserve currency of the world. I think if he decides to run things incredibly hot, he can probably get away with it without some of the dramatic inflationary effects.”

The inflationary zeitgeist

Cem thinks Trumponomics would be inflationary.

“His number one focus and his zeitgeist is, Hey, we’re not charging the rest of the world. We are the most powerful country in the world. And yet we are seemingly, at times, benevolent. He wants to completely tax the rest of the world for the power of the empire. That’s his zeitgeist.”

Yet Trumponomics could have a negative impact on the long-term stability of the U.S. economy and global markets.

Investors are already considering the implications of these potential scenarios. Investing in safe-haven assets like gold or hedging against currency risks could protect against potential market disruptions.

Alf points out that T-bills are “collateral to provide dollar liquidity to the outside world when it’s needed because there is $12 trillion of foreign debt issued in dollars by countries that don’t have access to the dollar unless they have a liquidity swap line with the Fed and other ways to get their hands on the dollar.”

He argues that Trump doesn’t necessarily want to shatter the foundations of American monetary policy, but he risks doing exactly that — “because as Cem says, he’s a power-play guy and he might overstep. He might — or maybe he might not. We don’t know, but … what about these tails? How are they priced? What probability can [investors] assign to Trump overstepping one of his policy agendas?”

Alf thinks the probability is “close to zero” and notes that gold is currently hitting new all-time highs.

“So where is gold supposed to trade if Trump oversteps on one of these policies and therefore shatters the foundation of the Euro/dollar system or the reserve currency status of the dollar?”

Watch for the wildcard

For Alf, “macro investing is about looking at odds and looking at the expected value of your trade versus what you think the odds are. And hopefully, sometimes you’ll be better than the market in forecasting these odds, and therefore, you’ll make money.”

Right now, he thinks the market is “probably underestimating some of these tail-Trump policies.”

The potential return of Donald Trump to the U.S. presidency represents a significant wildcard for global markets. Because a Trump presidency’s economic and international relations policies could lead to a period of increased market volatility and uncertainty, it’s crucial for investors, policymakers, and market participants to closely monitor developments and consider the potential risks and opportunities that may arise in this evolving geopolitical landscape.

Whether it’s through hedging strategies, diversifying investments or staying informed about political developments, let’s prepare for a range of outcomes.

Expecting the unexpected is essential in navigating the potential challenges ahead.

17/08/2024 by Naomi

“The Storm Abates!”

Trend Barometer and SG Trend Index

This week, the Trend Barometer dropped to 45%, down from last week's 61%, signalling a shift from a “very strong” trending environment to a “neutral/break-even” one. The 10-day rate of change is falling rapidly, indicating that market conditions have become less favourable for trend followers in the short term.

Last week, the environment was conducive to capturing trends if volatility continued, but this week’s conditions suggest a more challenging landscape. The decrease in the Trend Barometer highlights the market's shift towards a more neutral or weaker trending environment, where trends are less pronounced, and the potential for whipsaws is higher. For trend followers, this means staying cautious and possibly reducing exposure to avoid getting caught in non-trending or choppy markets.

As of August 15, the SG Trend Index shows a month-to-date (MTD) performance of -4.42%. This is an improvement compared to last week's MTD result of -6.03% as of August 9. Despite this improvement, the index remains in negative territory, indicating that trend-following strategies are still facing challenges this month.

Last week, the significant decline in the SG Trend Index highlighted the difficulties trend followers encountered due to sharp market volatility and sudden reversals, particularly in equity markets. This week, while the index has recovered slightly, the overall negative performance suggests that these challenges persist, albeit to a lesser degree.

Weekly Asset Class Snapshot

Here's how different asset classes moved this week, with a few key highlights:

Volatility Index: -21.01%
The Volatility Index saw a dramatic decline of 21.01%, indicating a significant reduction in market anxiety compared to last week. This sharp drop suggests that investors are expecting more stability in the near term, which could limit opportunities for capturing significant trends as market movement slows.

Grains: -3.17%
Grain prices fell by 3.17%, reflecting a combination of factors including favourable weather conditions and stable supply. This decline may indicate that the agricultural sector is currently experiencing a period of reduced volatility.

Meats: -0.44%
Meats experienced a slight decline of 0.44%, driven by balanced supply-demand dynamics and stable pricing. This minor movement suggests a relatively stable market without significant directional trends.

Bond: +0.23%
Bonds edged up by 0.23%, showing a slight increase as investors weighed economic data against potential rate hikes. This small movement reflects ongoing uncertainty in the bond market.

Energy: -0.64%
The energy sector saw a modest decline of 0.64%, indicating a slight decrease in energy prices. This could be due to fluctuating oil prices and concerns over global supply.

Metal: +4.21%
Metals saw a substantial increase of 4.21%, driven by fluctuating industrial demand and a stronger U.S. dollar. This uptick indicates renewed interest in the metals market, potentially signalling emerging trends.

Soft Commodity: +1.26%
Soft commodities rose by 1.26%, with varied performance across products like cocoa and sugar contributing to the overall increase. This suggests a mixed environment where certain commodities are beginning to trend.

Equity Index: +4.13%
Equity indices gained 4.13%, reflecting a strong recovery in investor sentiment after last week's selloff. This rebound could signal a return to a more bullish market environment, though it remains to be seen if this momentum will continue.

Currency: +0.44%
Currencies saw a minor increase of 0.44%, influenced by global trade dynamics and central bank policies. This modest gain indicates that currency markets are currently experiencing low volatility.

These movements indicate a week of mixed performance across different asset classes, with notable strength in metals and equity indices, contrasted by significant declines in the Volatility Index and grains. For trend followers, the divergence between these asset classes highlights the importance of being selective in identifying emerging trends.

Top 10 Bear and Bull Price Moves

Here's a detailed analysis of the key market movers for the week.

What’s Moving Up

Orange Juice: +8.47%

Orange juice prices surged by 8.47% this week, driven by concerns over supply disruptions due to adverse weather conditions in key producing regions. This significant increase reflects growing fears of a potential shortfall, leading to a bullish outlook in the market. For medium to long-term trend followers who have been riding this trend since December 2022, this bullish move would have been particularly favourable, reinforcing their positions and validating the strength of the ongoing upward trend. This continued momentum presents an opportunity to capitalize on the established trend as market conditions remain supportive of further price increases.

Nikkei 225: +6.59%

The Nikkei 225 index rose by 6.59%, reflecting a strong recovery in Japanese equities. This rebound was likely fuelled by investor optimism following the market's stabilization after the previous week's volatility, as well as positive corporate earnings reports. However, the significant volatility in the Nikkei presents a major challenge for trend followers who may have exited their positions during last week's sharp decline. It is likely that trend followers are now carefully monitoring the Nikkei before committing to long entries, waiting for clearer signals that the overall trend direction is re-establishing itself before re-entering the market.

Coffee: +6.06%

Coffee prices increased by 6.06% this week, driven by concerns over supply constraints in major coffee-producing countries. The ongoing uncertainty around production levels has fuelled a bullish trend in the market as traders anticipate potential shortages. This week’s bullish move would have been greeted favourably by trend followers who have likely been long in this market since its low in October 2023, further reinforcing their positions and validating the strength of the ongoing uptrend.

Silver: +5.43%

Silver prices climbed by 5.43% this week, benefiting from renewed interest in precious metals as a hedge against inflation and economic uncertainty. The rally in silver indicates growing demand for safe-haven assets amid concerns over global economic conditions. However, this bullish move may create a potential whipsaw for some shorter-term trend followers who may have been short this market since its high in May 2024. Medium to long-term trend followers are likely closely monitoring this market for signs of an emerging trend continuation before making any decisive moves.

• Nasdaq 100: +5.31%

The Nasdaq 100 index gained 5.31%, driven by strong performance in the technology sector. The rally was supported by robust earnings reports from major tech companies and a rebound in investor sentiment following recent market corrections. Similar to the Nikkei, the Nasdaq has bounced back significantly after last week's steep drop. This rebound could pose a challenge for trend followers who may have committed to short trades during the decline and previously exited their long positions with the sharp reversal. The sudden shift in market direction adds complexity to managing positions in this volatile environment.

What’s Moving Down

VIX (Volatility Index): -21.01%

The Volatility Index (VIX) experienced a dramatic drop of 21.01% this week, following an intense spike last week that was driven by fears of a potential U.S. recession and other global economic concerns. Last week, the VIX surged to over 65, marking its highest level since the COVID-19 crash in 2020. This spike was fuelled by a combination of factors, including a rapid unwinding of low-volatility strategies, poor market liquidity, and a sharp sell-off in equities triggered by weak jobs data and geopolitical tensions (BizNews.com) (InvestorPlace).

However, as investor fears began to dissipate, the VIX experienced its largest single-day drop in history, plummeting by around 35% in one day earlier this week. This rapid decrease reflects a stabilization in equity markets, with many investors now believing that the recent correction was more of a short-term adjustment rather than the start of a prolonged downturn. The sharp retracement in the VIX suggests that the market may be returning to a more normalized state in the short term, as fears of overvaluation have eased and confidence in the broader market has begun to rebuild (InvestorPlace).

This dramatic shift from extreme volatility to relative calm presents both challenges and opportunities for traders and trend followers, who must navigate these sudden changes in market sentiment with caution.

Soybean Oil: -6.13%

Soybean oil prices dropped by 6.13% this week, driven by a combination of oversupply and weaker demand. This decline continues the bearish trend that has been in place since its peak in April 2022, as favourable weather conditions in key growing regions further alleviate supply concerns. For trend followers, this bearish move would have been viewed very favourably, as many are likely short this market. The ongoing downtrend is gathering momentum, offering solid opportunities for those positioned to capitalize on the continued weakness in soybean oil prices. The acceleration of this trend provides trend followers with increasing confidence to maintain or even expand their short positions.

Soybeans: -5.18%

Soybeans fell by 5.18% this week, driven by the same factors impacting soybean oil, including ample supply and subdued demand. Like its cousin, Soybean Oil, Soybeans are offering an excellent short trend for medium to long-term trend followers since its peak in June 2022. This downward trend is gaining momentum and is shaping up to be quite the Outlier trade, providing significant opportunities for those who have been positioned short. As the trend continues to pick up pace, it reinforces the strategy of riding this prolonged bearish move in the agricultural sector.

Canola: -4.70%

Canola prices decreased by 4.7% this week, continuing a bearish trend fuelled by favourable growing conditions and strong global production. This decline reflects the overall weakness across oilseeds as the market adjusts to an abundant supply outlook. Since its peak in May 2022, Canola has been offering good shorting opportunities for trend followers. The entire grains complex seems to be entering a pronounced bearish phase, with this trend picking up steam and providing potential for further downside as the market continues to respond to robust supply conditions.

Cocoa: -3.94%

Cocoa prices declined by 3.94% this week, reversing the strong performance seen previously. The market remains in a significant congestion pattern with high volatility, making it challenging for trend followers to predict the next directional move. With the current uncertainty, trend followers are likely sitting on the sidelines, watching closely to see whether Cocoa will break out in either direction. This period of indecision highlights the cautious approach many traders are taking as they wait for clearer signals before committing to new positions.

Conclusion

This week has been a clear illustration of the ebb and flow that defines the futures markets. The sharp drop in the Trend Barometer from last week's highs reflects a cooling in trending conditions, making the landscape more challenging for trend followers. The market has shifted from a period of strong, decisive moves to one where caution and selectivity are paramount.

The ongoing volatility, especially highlighted by the rapid rise and subsequent fall in the VIX, serves as a reminder of the market’s unpredictability. While some sectors, like grains and oilseeds, continue to offer solid opportunities for those shorting the market, other areas, such as equities, present a more complex picture with sudden rebounds challenging established positions.

For trend followers, this week underscores the importance of staying flexible and alert. The market is in a state of flux, with some trends showing signs of continuation while others remain uncertain. Success in this environment will come to those who can adapt quickly to changing conditions, recognizing when to hold steady and when to pivot in response to new market dynamics. As we look ahead, staying informed and ready to act on emerging trends will be crucial for navigating the twists and turns of the markets.

Join us next week as we continue to navigate these turbulent markets, providing insights and analysis to help you stay ahead in the ever-changing world of futures trading.

List of Resources used in the Week in Review

Important Disclaimers

This document and its contents are proprietary information of TTU and may not be reproduced or otherwise disseminated in whole or in part without TTU’s prior written consent.

14/08/2024 by Naomi

Trend following is an investment strategy that capitalizes on the momentum of market trends. It's a straightforward yet powerful approach used by many successful investors. In this article, we'll break down what trend following is, the key principles behind it, why it can be a good investment choice, how to choose a trend following manager, and the advantages and disadvantages of this strategy.

What is Trend Following?

Trend following is an investment strategy that aims to profit from the continuation of existing market trends. The idea is simple: if a market is trending in a particular direction (up or down), it is likely to continue in that direction for some time. By identifying and following these trends, investors hope to ride the wave and make profits as the trend persists.

Key Principles of Trend Following

Price Action is Key: Trend followers rely on price movements rather than fundamental analysis. They believe that all available information is already reflected in the price.

Let Profits Run: Once a trend is identified, trend followers hold onto their positions as long as the trend continues. The goal is to maximize gains by staying in the trend for as long as possible.

Cut Losses Short: Trend followers have strict risk management rules. They may set stop-loss orders to exit positions that move against them quickly, minimizing potential losses.

Diversification: Trend followers often diversify across different markets and asset classes to spread risk and increase the chances of catching trends.

Mechanical Systems: Many trend followers use systematic trading strategies based on predetermined rules, removing emotional decision-making.

Why Invest in Trend Following?

Profit from Market Movements: Trend following allows investors to capitalize on significant market moves, whether in stocks, bonds, commodities, or currencies.

Non-Correlated Returns: Trend following can perform well in different market conditions, providing diversification benefits to a traditional investment portfolio.

Historical Success: Trend following has a long track record of success, with many notable managers employing this strategy effectively.

How to Pick a Trend Following Manager

Track Record: Look for managers with a proven history of success in trend following. Successful long-term performance over different market cycles is a good indicator of skill, even if the monthly returns can be volatile.

Risk Management: Assess the manager's approach to risk management. Effective trend followers should have clear strategies for cutting losses and protecting capital.

Transparency: Choose managers who are transparent about their strategies and performance. This includes regular reporting and clear communication.

Fees and Costs: Understand the fee structure. It’s important that there is a fair balance between a management and performance fee.

Advantages of Trend Following

Simplicity: The strategy is based on clear and simple rules, making it accessible to many investors.

Adaptability: Trend following can be applied across various markets and asset classes, offering flexibility.

Risk Management: The emphasis on cutting losses helps protect capital and manage risk effectively.

Disadvantages of Trend Following

Whipsaws: Markets can experience short-term fluctuations that trigger false signals, leading to small losses that may build to meaningful drawdowns, known as whipsaws.

Reversals: If a number of markets and sectors experience rapid reversals of their current long-term trends, this can lead to sharp and meaningful losses for trend following strategies…but this is completely natural.

Requires Discipline: Sticking to the strategy requires discipline, especially during periods of sideways or choppy markets.

Potential for High Costs: Frequent trading can lead to higher transaction costs, which can eat into profits, unless managers are able to negotiate competitive brokerage fees.

Conclusion

Trend following is a time-tested investment strategy that leverages market momentum to generate profits. By understanding its key principles, recognizing why it can be a valuable addition to your investment portfolio, and knowing how to choose a competent trend following manager, you can make informed decisions about incorporating this approach into your investment strategy. Like any investment method, it has its pros and cons, but with the right mindset and discipline, trend following can be a powerful tool in any investor's arsenal.

For more information about trend following, check out the free eBook “Ten Reasons to Add Trend Following to Your Portfolio” which gives an in-depth explanation of the benefits of this robust strategy.

10/08/2024 by Betsy McDowell

Despite their different underlying economic conditions, central banks around the world have largely kept similar monetary policies anchored on inflation targeting.
According to economist Adam Posen, the public often carries negative misconceptions about inflation data, leading to investor overreactions on central bank communications. The Federal Reserve especially must work to set and manage realistic expectations.
Regardless of who wins the 2024 election, the American political climate is poised to keep inflation above the target rate for at least the next five to ten years.

Since the COVID-19 pandemic, nearly every major global economy has followed a similar monetary policy. First, interest rates plummeted to stimulate the shell-shocked economy, then central banks reversed course to address the subsequent inflation.

While 2024 has been a year of speculation on Federal Reserve rate cuts — and a growing chorus to expect “higher-for-longer” interest rates as the U.S. economy has remained stubbornly resilient to the pressures of inflation, there’s a larger macroeconomic mystery that isn’t getting much attention.

With the notable exception of Japan, central banks around the world have kept interest rates elevated since early 2022. Intriguingly, however, these major economic areas — the U.S., the European Union, the U.K. and Brazil among others — have significant differences in energy supply, labor markets, proximity to conflict zones and other factors that one might predict would create differences in monetary policy. What’s driving this almost singular narrative of central bank decisions?

This is the question Adam Posen recently asked in an opinion piece for the Financial Times. Adam is President of the Peterson Institute for International Economics, a nonpartisan global think tank, and his long career includes numerous consulting positions for the Federal Reserve, Bank of England and other government agencies.

In 1998, Adam co-authored “Inflation Targeting: Lessons from the International Experience.” This book was an early case study on the efficacy of inflation targeting — that is, a central bank’s transparent commitment to bring inflation to a specified rate. Somewhat to Adam’s surprise, this theory mapped out almost three decades ago is an accurate descriptor for current central bank behavior.

“If you have a credible long-term anchor for expectations with an independent central bank acting transparently, you can ease [inflation] in the short term,” Adam says.

Host Alan Dunne recently spoke with Adam on a Global Macro edition of Top Traders Unplugged to ask more about the underlying factors informing expectations around central bank decisions and the political conditions that could influence monetary policy decisions in the next few years. Read on for the key findings — and advice on how investors should move in response to central bank communication.

The mystery of central bank conformity

In many ways, Adam argues, the near-uniformity of central bank positioning on inflation should come as a surprise to economists.

“There’s a huge difference in energy consumption and energy market structure in the U.S. versus Europe versus the U.K.,” Adam says. Parts of Europe have much larger exposure to imported food and imported energy when compared to the U.S., while the labor market in Central and Eastern Europe has considerably lower costs when compared to Western Europe, the U.S. and Canada. Of course, there are also differences in demographics, political systems and proximity to the ongoing conflict in Ukraine.

And yet, dozens of nations all hiked interest rates in 2022, and, in the first half of 2024, the European Central Bank (ECB) and Canada were among the many financial institutions to announce rate cuts, almost as if there were a global playbook that everyone’s following.

“The fact that such different economic structures didn’t have differing effects [on interest rates] needs an explanation,” Adam says. “Otherwise, there’s nothing that’s similar across countries.”

The only common thread is a policy response to inflation.

So what exactly is that policy? More than just a numerical response to consumer prices and employment data, Adam sees a concerted effort for central banks to set and uphold public expectations. This is the idea of a target inflation rate, which for the ECB, U.S., U.K., Brazil and many other nations stands between 2% and 3%. If inflation remains above the target, central banks will tighten, while if inflation nears the target, interest rates will drop. Critically, for this system to work, central banks have to be transparent.

Managing expectations

Speaking about high-income economies in particular, Adam describes the public view of inflation as asymmetric. “[Most people] hate overshooting inflation more than they hate undershooting,” he explains.

For instance, it’s well documented that, over the last year especially, most Americans have negative misconceptions about the economy, such as believing the economy is shrinking while actually GDP is growing. Above-target inflation, then, likely sounds worse to the general public than it does to economists or investors.

Unfortunately for central banks, most forecasters see inflationary headwinds in the next decade. “For climate reasons and geopolitical reasons, we should expect there’s going to be more energy and food price shocks, more wars, sadly, and more migration,” Adam says. So central banks are between a rock and a hard place — the public hates high inflation, but a 2% target seems unattainable for the foreseeable future.

Even if some members of the Fed might think 3% or even 4% is a more realistic inflation target, moving the goalposts now risks a major hit to their credibility. “Announcing inflation targets is kind of like announcing an exchange rate peg. Once you announce it, it’s very hard to change,” Adam explains.

The result is what has become these highly dramatized news conferences where Jerome Powell, Chair of the Federal Reserve, tries to offer guidance while preventing an overreaction in the markets. He strikes a balance between reminding that the U.S. hasn’t reached the 2% inflation target while maintaining enough positivity to avoid a backlash. “Whenever [Powell] makes a statement, he’s correcting to the dovish, or the hawkish side from what his last statement was,” Adam notes.

But is it misleading to put so much emphasis on the nominal interest rate? Some critics of inflation targeting say that is.

More than just numbers

Economists look not just at the established Fed funds rate but also the real interest rate — one adjusted for inflation. For example, if the interest rate on a deposit is 4% but inflation is 3%, the actual return on investment is only a 1% gain in purchasing power.

Alan asks, “Which of these is more important — nominal [interest] rates, real rates, financial conditions or changes in the rates?”

For Adam, financial conditions are an easy winner. As discussed, the Fed’s changes to the nominal rate aren’t necessarily tied to the impact of inflation, and “the real rate of interest is not a sufficient statistic for credit conditions,” he explains. Bond credit spreads, international capital flows and even consumer savings behavior all impact the lending process.

As an example, Adam points to the 2023 collapse of Silicon Valley Bank (SVB) as the result of poor regulation and supervision, not as something tied to inflation or interest rates. In other words, the financial conditions driving tech startups to make heavy withdrawals — combined with SVB’s failure to properly manage its deposits and hedge against interest rates risk — were to blame, not the central bank’s monetary policy.

The takeaway? Adam advises investors to be wary of market overreactions to any interest-rate announcements from the Fed.

“If there is a large move due to a [Federal Reserve] statement, I would take the other side of that bet,” Adam says.

Observations of the US economy

After more than a year of holding interest rates steady, the Federal Reserve has signaled that it won’t wait until reaching the target of 2% inflation before cutting rates. How should investors understand the current state of the U.S. economy? Adam offers four observations.

1. Prepare for a soft landing

Powell’s comments show that the central bank may be responding to public pressure. Instead of holding the line until inflation comes down closer to the target rate, the Fed may look to keep pace with other nations that have already started to lower the cost of borrowing.

“The Fed is not as tight as they think they are,” Adam says. “I don’t expect any sharp downturn.” In other words, one way to look at the sustained inflation in recent months is to say the Federal Reserve isn’t putting enough pressure on the economy to dampen the market. The so-called soft landing that avoids a recession is increasingly possible, especially if a small downtick of the Fed funds rate reignites business spending.

2. Expect congressional spending

No matter the outcome of the 2024 presidential election, Adam predicts Congress will continue to stimulate the U.S. economy in 2025 — at least more so than where most baseline expectations sit right now.

“There’s going to be defense spending, infrastructure spending, industrial policy spending, irrespective of what happens [in the election],” Adam says. Government spending could be another factor helping the U.S. avoid recession, and potentially a factor keeping inflation above the target rate.

3. Watch for a productivity jump

In 1996, before the internet had taken hold of everyday life, then-Fed Chairman Alan Greenspan predicted the information technology boom would drastically increase economic productivity. Now, in the age of artificial intelligence and machine learning, we could be looking at another productivity jump in the next several years.

Adam sees labor hoarding and heavy investment into AI technologies as two indicators that a positive productivity shift is coming, “probably in less than five years.” A corresponding surge in economic output is another reason the U.S. is likely to sidestep a recession.

4. Get ready for stagflation politics

Finally, no matter who takes the White House in 2024, Adam expects policy-making to slow economic growth and raise prices for Americans.

Anti-trade policies — as both Democratic leaders and Donald Trump have campaigned to be tough on China — will likely have an inflationary effect as tariffs pass higher costs onto consumers. Meanwhile, “anti-migration policies, including deportations, are going to be contractionary,” Adam adds. The combination of higher prices and slow economic growth is known as stagflation.

Monitoring political impacts

Speaking of politics, Adam views far-reaching nationalist policies as the biggest threat to central bank independence. “If there is a fiscal crisis in the next few years,” he says, “it is likely going to be completely due to political breakdown in the U.S., not due to market forces.”

But thinking optimistically that Congress can continue to function — growing peacetime, non-pandemic deficits will keep high interest rates on U.S. bonds. If China, historically one of the largest holders of U.S. Treasuries, slows its bond purchases, there could be even more upward pressure on rates.

“We potentially end up with a world that further increases U.S. interest rates because there’s just simply a smaller supply of savings to fund a larger supply of Treasuries,” Adam explains.

Think contrarian

So we’re left with a familiar paradox. The public has no patience for inflation, and it behooves the Federal Reserve to speak in terms of meeting a target, even if all other economic factors indicate that goal is entirely unrealistic in the next few years. The Fed is clearly feeling some pressure to announce rate cuts in the coming months, but Adam sees sustained high rates as the more likely macro-narrative. If other investors are prone to overreact at the next Fed press conference, perhaps it’s wise to look the opposite way.

10/08/2024 by Naomi

“Market Volatility Puts Trend Followers on the Edge!”

Trend Barometer

This week, our trusty Trend Barometer has risen to 61%, signalling an improvement in trending conditions to “very strong” compared to last week's read of 48%. While this uptick suggests a more favourable environment for trend followers, it contrasts with the SG Trend Index's month-to-date (MTD) result of -6.03%, a significant drop from last week’s MTD read of -2.46%. The divergence between the two indicators highlights the complex nature of this week's market, where the overall potential for trends increased slightly, but the sharp volatility, particularly in equity markets, led to material losses in trend-following portfolios. This underscores the delicate balance between emerging trends and the rapid reversals that can disrupt them.

The Barometer is more sensitive to short term models, so hopefully this improvement will be felt by medium to long term trend followers in the coming weeks.

This week's equity market volatility was driven by a combination of factors that culminated in a significant selloff in equities, particularly on August 5th. The turmoil was sparked by unexpected policy changes in Japan, where a surprise rate hike by the Bank of Japan led to the unwinding of the yen carry trade, a strategy where investors borrow in yen to invest in higher-yielding assets. This move sent shockwaves through global markets, with the Tokyo Nikkei 225 index experiencing one of its worst single-day losses in recent history, dropping over 12%. The ripple effects were felt worldwide, including in the U.S., where the S&P 500, Nasdaq, and Dow Jones all saw significant declines.

Contributing to the volatility was also a disappointing U.S. jobs report released on August 2nd, which showed weaker-than-expected employment growth. This report heightened fears of an economic slowdown, further unsettling investors already jittery from geopolitical tensions and mixed corporate earnings reports, particularly in the tech sector. The selloff in technology stocks was exacerbated by news that Warren Buffett’s Berkshire Hathaway had reduced its stake in Apple, one of the largest and most influential companies in the market.

For trend followers, this level of extreme volatility presents unique challenges. Rapid changes in market sentiment, such as those seen this week, can disrupt established trends and lead to sharp reversals that are difficult to navigate. These abrupt shifts can cause significant losses in portfolios that rely on the continuation of trends, as existing positions may be prematurely closed out, and new trends may not have time to fully establish. As a result, trend-following strategies often face short-term vulnerabilities during such volatile periods. The key for trend followers will be to remain vigilant and adaptable, monitoring the market closely for signs of whether this correction is a temporary disruption or the start of a more sustained market shift.

Weekly Asset Class Snapshot

Here’s how different asset classes moved this week and some of the broad reasons behind these movements:

Volatility Index: -10.31%: The sharp decline in the VIX reflects a significant reduction in market anxiety following the equity market correction early in the week, suggesting that investors are expecting more stability in the near term.
Grains: -1.78%: Decline due to favourable weather conditions and stable supply.
Meats: -2.23%: Decrease driven by balanced supply-demand dynamics and stable pricing.
Bond: -0.97%: Slight decline as investors weigh economic data against potential rate hikes.
Energy: +3.52%: Increase influenced by rising crude oil prices amid supply concerns.
Metal: -1.69%: Modest decline driven by fluctuating industrial demand and a stronger U.S. dollar.
Soft Commodity: +4.45%: Uptick due to varied performance across products like cocoa and sugar.
Equity Index: +0.10%: Marginal increase reflecting mixed investor sentiment post-correction.
Currency: +0.13%: Minor increase influenced by global trade dynamics and central bank policies.

Top 10 Bear and Bull Price Moves

Here's a detailed analysis of the key market movers for the week.

What’s Moving Up

Cocoa Increases by 18.01%

Cocoa prices surged by an impressive 18.01% this week, driven by concerns over supply disruptions in major producing regions. Despite the size of this move, Cocoa is currently experiencing significant volatility and remains in a phase of congestion. For trend followers, this sharp increase presents a challenge, as it does not yet indicate a clear future direction for Cocoa. The current market behaviour suggests that trend followers are likely watching and waiting for a definitive breakout from this volatile congestion before committing to a directional trade. The large up move this week adds to the uncertainty, making Cocoa a market to monitor closely in the coming weeks to see which direction it ultimately takes.

Natural Gas Increases by 9.86%

Natural gas prices rose by 9.86% this week, reflecting ongoing volatility in the market. However, despite this significant increase, Natural Gas remains within a period of congestion and mean reversion that began in February 2023. For trend followers, this market behaviour suggests caution, as the current price movements do not yet signal a clear directional breakout. As such, trend followers are likely sitting on the sidelines, closely monitoring the situation to see if Natural Gas will break out either long or short from this prolonged congestion phase. Until such a breakout occurs, the market remains one to watch rather than actively engage in.

Crude Oil WTI Increases by 4.71%

West Texas Intermediate (WTI) crude oil prices climbed by 4.71% this week, driven by ongoing concerns about global oil supplies. However, like Natural Gas, Crude Oil WTI is currently in a period of congestion and mean reversion. As a result, trend followers are unlikely to be actively participating in this market at the present time. Instead, they are closely monitoring the situation to determine which direction Crude Oil will ultimately take. Until a clear breakout occurs, whether long or short, trend followers are likely to remain on the sidelines, waiting for more decisive market signals.

Crude Oil Brent Increases by 4.06%

Brent crude oil prices increased by 4.06% this week, driven by supply concerns and geopolitical tensions. However, despite this significant up move, Brent, like its cousin Crude Oil WTI, remains in a period of congestion with no clear guidance on whether it will break out to the upside or downside. This ongoing phase of mean reversion and congestion means that trend followers are likely to remain cautious, watching closely to see which direction Brent will ultimately take before making any significant trading decisions.

• Lumber Increases by 3.45%

Lumber prices rose by 3.45% this week, showing early signs of entering a bullish phase since hitting a low in July 2024. This recent uptrend may indicate the beginning of a longer-term recovery, which trend followers could be eager to capitalize on. Given the potential for continued upward momentum, some trend followers may already be jumping on board this early trend, positioning themselves for what could be a sustained rise in lumber prices. If this bullish phase continues to develop, it could present a strong opportunity for those ready to ride the trend for the long haul.

What’s Moving Down

VIX Declines by 10.31%

The Volatility Index (VIX) experienced a significant drop of 10.31% this week, reflecting a sharp reduction in market anxiety following the early-week equity market correction. This decline suggests that the market’s recent turbulence, particularly the steep selloff on August 5th, may have been more of a short, sharp shock rather than a precursor to a sustained bearish trend in equities.

This week’s volatile ride was characterized by an initial spike in the VIX as investors reacted to unexpected economic data and geopolitical developments, including Japan's surprise rate hike and weaker-than-expected U.S. jobs numbers. However, as the week progressed, market participants seemed to regain their composure, and the VIX retreated sharply. This reduction in volatility could indicate that investors are beginning to view the correction as a brief disruption rather than the start of a prolonged downturn.

For trend followers, the sharp decline in the VIX might signal a return to more stable market conditions, but it also calls for caution. Reduced volatility often correlates with lower market movement, which could limit opportunities for capturing significant trends. As the market digests the recent shocks, trend followers will need to stay alert for any new developments that might disrupt the calm and signal the next potential move in equities (Edward Jones) (FS Investments) (Vantage |) (Wells Fargo Advisors).

Soybean Meal Declines by 6.44%

Soybean meal prices fell by 6.44% this week, driven by oversupply and weaker demand. This decline would have been welcomed by trend followers with open arms, as it aligns with the broader bearish trend that has persisted since February 2023. The continuation of this downtrend confirms the persistence of bearish sentiment in the market, providing trend followers with the confidence to maintain or even increase their short positions. This consistent downward momentum reinforces the strategy of riding the trend, with this week's move acting as further validation of the prevailing market direction.

Platinum Declines by 3.84%

Platinum prices dropped by 3.84% this week, influenced by weaker industrial demand and a stronger U.S. dollar. Platinum remains in a congestion pattern, and trend followers are likely keeping a close eye on the market for signs of a breakout from this range. While the broader congestion persists, some shorter-term trend followers may be capitalizing on this recent bearish move, riding the decline in anticipation of further downward momentum. However, the overall market remains uncertain, with many waiting for a clearer directional signal before committing to more substantial positions.

Lean Hogs Decline by 3.40%

Lean hog prices decreased by 3.40% this week, continuing the bearish trend that has been in place since April 2024. This recent move is likely being actively ridden by trend followers, as it confirms the sustained bearish momentum seen in this asset over the past few weeks. The consistent downward pressure, driven by ample supply and weakening demand, provides trend followers with further confidence to maintain or even increase their short positions as the market continues to trend lower.

Silver Declines by 3.00%

Silver prices fell by 3.00% this week, driven by reduced industrial demand and a stronger U.S. dollar. Trend followers may have benefited from this price movement, as Silver has been in a downtrend since peaking in May 2024. This week’s decline further reinforces the bearish trend, providing trend followers with an opportunity to capitalize on the continued downward momentum. Those who have been short on Silver are likely seeing this move as a confirmation of the ongoing trend, aligning with their strategy to ride the decline in the precious metals market.

Conclusion

This week has been a stark reminder of the unpredictable nature of the markets. The extreme volatility, particularly in the equity markets, was driven by a combination of unexpected global developments, including Japan's surprise rate hike and a disappointing U.S. jobs report. These factors culminated in a sharp selloff, with markets across the globe reacting violently to the news. The Tokyo Nikkei 225's dramatic drop and the ripple effects felt in the U.S. equity markets underscored the interconnectedness of global markets and the rapid shifts that can occur when key economic indicators and policy decisions are involved.

For trend followers, this week's turbulence has been both a challenge and an opportunity. The significant decline in the SG Trend Index, coupled with the sharp swings in market sentiment, highlights the delicate balance that must be maintained during such volatile periods. The rapid reversals in market direction made it difficult for trend-following strategies to adjust quickly, leading to short-term vulnerabilities. However, as the dust begins to settle, the potential for new trends to emerge becomes a key focus.

As we move forward, it is crucial for trend followers to remain both vigilant and adaptable. The reduction in volatility towards the end of the week might signal a return to more stable conditions, but the underlying uncertainties in the global economy will keep markets on edge. Being prepared for both the opportunities and challenges that could arise from new trends will be essential. Whether this week's correction is a short-lived disruption, or the beginning of a more prolonged market shift remains to be seen. What is certain is that the ability to swiftly adapt to changing conditions will be a significant determinant of success in the weeks to come.

Join us next week as we continue to navigate these turbulent markets, providing insights and analysis to help you stay ahead in the ever-changing world of futures trading.

List of Resources used in the Week in Review

Important Disclaimers

This document and its contents are proprietary information of TTU and may not be reproduced or otherwise disseminated in whole or in part without TTU’s prior written consent.

03/08/2024 by Betsy McDowell

Is the U.S. economy about to enter a recession? That’s up for debate, but there are leading indicators we can use to make an educated guess — like the Sahm Rule.
Economist Claudia Sahm developed the rule that bears her name based on the rate of percentage change of the unemployment rate.
What does the Sahm Rule reveal about the economy’s current condition, and why is this metric so revealing.

“When I went to college, I didn’t even know what an economist was, let alone that I wanted to be one,” says Claudia Sahm, Chief Economist at New Century Advisors, author of the Stay-At-Home Macro Substack and creator of the Sahm Rule.

“Within pretty short order, I was convinced that economists can do good in the world. We have tools to go at problems that are really important.”

Claudia’s perspective on economics highlights the importance of interdisciplinary thinking. She argues that understanding economics isn’t just about studying current theories and data but also involves considering broader contexts. Her emphasis on interdisciplinary thinking — integrating political economy, historical perspectives and practical policy design — provides a more comprehensive, adaptable understanding of economic issues, which is essential for progress.

Claudia joined host Alan Dunne on an Global Macro installment of Top Traders Unplugged to discuss the current macroeconomic outlook, the state of the US labor market, the recent decline in inflation and much more.

Sahm signals

“The origin of the Sahm Rule ties very much into why I’m an economist,” says Claudia, who developed a proposal in 2019 with several other economists on how to prepare better for the next recession. “This was before we even knew that a recession was coming, and the idea was to take policies that we often do (in my case, the stimulus checks) and put them on autopilot; tie them to economic conditions, have them ready to go, and as soon as the economy takes a turn for the worse, get the help out.”

Identifying the economic conditions that could “very predictably” signal a recession is invaluable “because things, once they start going south, can head south fast,” she adds.

The Sahm Rule focuses on changes in the unemployment rate as a leading recession indicator.

“There’s no magic level,” Claudia points out. “The United States has gone into recessions with an unemployment rate of 4% and with the unemployment rate at 8%. It’s really about how things deteriorate. Are they getting worse?”

Data from the past several decades, however, tells us that “it doesn’t take much of an increase in the unemployment rate to tell us we’re in a recession,” she notes.

Forecasting the future

While rooted in economic data, the Sahm Rule’s development was influenced by Claudia’s broader perspective on policy — such as automatic stabilizers that adjust based on economic conditions. Her foresight was particularly valuable during the COVID-19 pandemic, when rapid economic intervention was crucial.

Despite its innovative design, the Sahm Rule has not yet been used to trigger preset economic measures. However, its existence underscores the importance of preparing for economic downturns in advance. By automating policy responses, the rule aims to reduce the lag between economic shocks and government intervention.

One might argue that the Sahm Rule is a model for proactive economic management. By automating certain policies, governments can ensure timely support in response to economic shocks, reducing the impact of recessions.

Are we heading towards a recession?

The relevance of the Sahm Rule is readily apparent in the current economic climate. While we haven’t reached the 5% increase threshold, the unemployment rate is at 4%, indicating that the economy is on shaky ground.

The periodic recession anxiety we’ve seen in recent years has previously been accompanied by a strong labor market. Now, Claudia says we’re “much, much, much closer” to a recession than we’ve been at any point in the post-pandemic recovery.

“The labor market, for the U.S. really, is the linchpin because most Americans spend what they make — either because they have to or they like to,” she argues. “And most Americans, what they have to spend comes from their paychecks. So we’ve seen a very positive virtuous circle between the labor market and the American consumers. If you lose that, then you’re done.”

Alan asks, “What led to this point?”

“Unlike some of our peer countries, we had a very rapid recovery,” Claudia explains. “And not just the inflation came back. The United States last year had above-trend growth. Things were just moving really fast. And we want to get onto a glide path. We want to come out of this in a sustainably good place. When things are running too fast, it’s often not sustainable and you end up crashing.”

The U.S. economy experienced rapid growth, followed by a period of moderation. This transition makes the economy more vulnerable to policy mistakes. Sahm emphasizes the importance of monitoring a wide range of economic indicators, not just relying on a single measure like the Sahm Rule. The labor market, in particular, is a crucial indicator. Strong employment supports consumer spending, which drives economic growth.

Our next cycle, by the numbers

The most recent labor data was “seemingly strong,” says Alan. “But at the same time, the prior numbers were weak. And then you’ve had a recent pickup in jobless claims. At the same time, the jobs have been easing. … Putting it all together, how would you characterize it?”

Claudia points out that the payroll employment number in May was a far bigger increase month over month than expected (although she notes that the payroll employment data was weaker in April).

Although May’s impressive numbers led to a widespread belief that the labor market was strong and defied expectations, the unemployment rate hit 4% for the first time in over two years.

“We’ve had a notable increase in our unemployment rate since the middle of last year,” Claudia says, adding that that 4% figure has “some very clear ties to the jobs number in the [same] survey,” which was “horrible” — down by about 400,000.

Will the Sahm Rule hold true in the coming months?

Time will tell. But Claudia’s approach to economics demonstrates the value of looking beyond traditional boundaries toward a more nuanced understanding of economic issues. As the unpredictable becomes utterly predictable, her insights remind us of the importance of maintaining a broad perspective. By staying open to new ideas and learning from the past, we navigate the complexities of today’s economic landscape with more resilience than ever before.

03/08/2024 by Naomi

Important Note: This week, we needed to prepare the report a few days early due to other commitments, so we decided to prepare the report for the end of the month as of Wednesday, July 31, 2024. Going forward, we will return to our normal reporting schedule, publishing each week based on the Friday close of the week.

“Is it Olympic Gold for Trend Followers this Week?!”

Trend Barometer

This week, our trusty Trend Barometer has shown a significant improvement, rising from a weak start of 36 to a more promising 48. While this indicates neutral/break-even conditions, the upward trend suggests that better times might be ahead for trend followers. The SG Trend Index, although showing a month-to-date (MTD) decline of -2.46%, has improved from last week’s read of -3.36%, highlighting some positive momentum despite the overall challenges faced this month. Year-to-Date the index ended July +6.01%.

In summary, performance improved that last few trading days of July. We likened this week's performance to an Olympic race to end the month: a strong start, a challenging mid-section, and a sprint finish to Wednesday that fell just short of securing the gold medal.

Weekly Asset Class Snapshot

Here’s how different asset classes moved this week and some of the broad reasons behind these movements:

Volatility Index: -6.87%: The sharp decline in the VIX reflects reduced market uncertainty, allowing for a more stable trading environment.
Grains: -2.94%: Weak performance due to ample supply and stable demand.
Meats: -0.80%: Slight decline amidst balanced supply and demand dynamics.
Bond: +0.82%: Investors shifting towards safer assets amidst volatility.
Energy: -0.55%: Small decline influenced by fluctuating crude oil prices.
Metal: +0.72%: Modest increase driven by industrial demand.
Soft Commodity: +0.80%: Slight uptick due to varied performance across products like coffee, cocoa, and sugar.
Equity Index: +1.57%: Positive movement reflecting improved investor sentiment and reactions to corporate earnings.
Currency: +0.31%: Minor increase influenced by global trade dynamics and macroeconomic data.

Top 10 Bear and Bull Price Moves

Here's a detailed analysis of the key market movers for the week.

What’s Moving Up

Sugar Increases by 6.20%

Sugar prices surged by 6.20% this week, driven by strong demand and supply concerns. This spike is particularly notable and challenging for trend followers, as it disrupts the overall downtrend that has persisted since its peak in November 2023. Adverse weather conditions in key sugar-producing regions like Brazil and India have resulted in reduced crop yields and disrupted harvests, tightening global supply. Concurrently, increased consumption spurred by the reopening of economies and festive seasons has elevated demand.

For trend followers, this unexpected price increase poses significant difficulties. Many likely held short positions anticipating further declines, and the reversal may have led to losses this week. Increased speculative activity has also heightened market volatility, complicating navigation and strategy adjustments.

Rough Rice Increases by 2.94%

Rough Rice prices rose by 2.94% this week, driven by adverse weather conditions affecting supply. This move is particularly challenging for trend followers who may have been short, following the steep drop in price from its recent peak in April 2024. Unfavourable weather in major producing regions has disrupted planting and harvesting schedules, leading to supply constraints.

For trend followers, this unexpected upward movement complicates trading strategies. Many likely held short positions expecting continued declines, and this reversal may have resulted in losses.

30 Year Bond Increases by 2.78%

The 30-year bond saw a 2.78% increase this week, reflecting a shift towards safer investments amid ongoing market volatility. This move may signal a potential breakout to the upside, following a prolonged downtrend since March 2020. Several factors have contributed to this increase.

Economic Signals: Recent economic data suggests that inflation is slowing, with the Federal Reserve's preferred measure, the core personal consumption expenditures (PCE) price index, moving closer to the Fed’s 2% target. The Fed has also indicated it may have concluded its rate-hiking cycle, with potential rate cuts on the horizon (Schwab Brokerage) (Morgan Stanley). This has led to increased demand for longer-duration bonds as investors anticipate more favourable conditions for fixed-income securities.

Flight to Safety: In the face of economic uncertainties and fluctuating equity markets, investors are seeking the relative safety of long-term bonds. This shift is driven by concerns over global economic growth and ongoing geopolitical tensions, which have heightened the appeal of secure government bonds (Schwab Brokerage) (Morgan Stanley).

For trend followers, this upward movement could indicate the beginning of a new trend. Those who have been short on the bond due to its extended decline might need to reassess their positions. The increased demand for safer assets highlights the importance of staying adaptable and vigilant in response to changing market conditions, ensuring timely adjustments to trading strategies.

Russell 2000 Increases by 2.70%

The Russell 2000 index rose by 2.70% this week, continuing its long-term bullish trend and providing opportunities for long positions. This surge is part of a notable uptrend since its recent low in October 2023. Several factors have contributed to this positive movement.

Interest Rate Expectations: Investors are anticipating potential interest rate cuts by the Federal Reserve, expected to begin in September. Lower borrowing costs are particularly beneficial for small-cap stocks, which often have higher debt levels compared to large-cap companies. This expectation has fueled a rally in the Russell 2000 as investors position themselves to benefit from the expected easing of monetary policy (markets.businessinsider.com).

Economic Optimism: There is growing optimism around economic conditions improving, which has boosted investor confidence in small-cap stocks. Analysts have pointed out that smaller companies could see substantial gains if economic growth continues and borrowing costs decrease (markets.businessinsider.com). Additionally, the upcoming U.S. presidential election is adding to this optimism, with policies expected to favour deregulation and support for small businesses.

For trend followers, this upward movement aligns with the ongoing uptrend since October 2023. Capitalizing on this trend, many would have positioned themselves long, and the recent increase further validates this strategy. The combination of favourable economic conditions, expected rate cuts, and positive investor sentiment creates a conducive environment for continued gains in the Russell 2000.

JPY Increases by 2.69%

The Japanese Yen saw an increase of 2.69% this week, driven by shifts in global trade dynamics and investor sentiment. This week's up move was against the long-term downtrend that has been in place since the high in January 2021. Several factors contributed to this recent strength.

Central Bank Policies: A key driver has been the Bank of Japan (BoJ) signalling potential policy shifts. Recent indications from the BoJ about possibly exiting its ultra-loose monetary policy have boosted the Yen. The BoJ raised its inflation forecast, suggesting that it might move towards tightening monetary policy in the near future, which has supported the Yen's value (IG) (Citi Asia).

Global Economic Conditions: Additionally, the expectation of future rate cuts by the Federal Reserve has also played a role. As the Fed signals a potential easing of its aggressive rate hikes, the yield differential between U.S. and Japanese bonds narrows, making the Yen more attractive compared to the Dollar. This has been compounded by a general flight to safety amid geopolitical tensions and economic uncertainties, further increasing demand for the Yen (Citi Asia) (DailyFX).

For trend followers, this upward movement was against the established long-term downtrend. Many trend followers likely held short positions anticipating continued depreciation of the Yen, and this reversal may have led to losses.

What’s Moving Down

Canola Declines by 7.01%

Canola prices declined by 7.01% this week, reflecting oversupply and weaker demand dynamics. High production levels in key producing regions, coupled with a lacklustre demand, have contributed to this significant price drop. This decline is favourable for trend followers who have likely been short since the peak in May 2022. The continuation of the bearish trend provides opportunities for trend followers to maintain or increase their short positions in anticipation of further decreases in price.

The global canola market has faced persistent challenges with high yields reported in Canada and Europe. These regions have seen bumper crops, leading to increased supply levels. Additionally, weak demand from key importing countries has exacerbated the oversupply situation, resulting in downward pressure on prices (DailyFX).

VIX Declines by 6.87%

The VIX saw a significant decline of 6.87%, indicating reduced market volatility and uncertainty. Often referred to as the “fear gauge,” the VIX measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The reduced reading suggests a more subdued and favourable outlook for equity investors, signalling decreased anxiety about potential market downturns and a more stable investment environment. This environment typically supports risk-taking and can lead to bullish sentiment in equity markets.

Lower readings in the VIX reflect a more confident market environment where investors feel less need for protective measures against market swings. This confidence is often driven by stable economic indicators and positive corporate earnings reports. The current low volatility suggests that investors expect steady market performance, reducing the perceived risk of sharp declines (DailyFX).

Corn Declines by 5.26%

Corn prices dropped by 5.26%, influenced by high production levels and stable demand. This decline is favourable for trend followers as corn has been in an established downtrend since April 2022. The continued high yields and steady consumption have exerted downward pressure on prices, allowing trend followers to capitalize on their short positions.

The U.S., being one of the largest corn producers, has reported record-high production levels, which have kept the market well-supplied. Additionally, stable global demand, especially from major importers like China and Mexico, has not been sufficient to offset the oversupply, leading to a continued downward trend in prices.

Natural Gas Declines by 5.14%

Natural gas prices fell by 5.14%, driven by continued high production levels and lower seasonal demand. Despite the downward movement, natural gas is still trading within an established congestion phase since February 2023. Trend followers are likely observing this market for signs of a breakout from this congestion pattern but are unlikely to be actively participating in this asset at the present moment due to the lack of a clear trend.

The energy market has been experiencing fluctuations with natural gas inventories remaining high due to robust production in the U.S. and Russia. Seasonal factors, such as milder weather reducing heating demand, have also contributed to the current price decline. Analysts suggest that a significant breakout from this congestion phase would require either a sharp increase in demand or a notable reduction in production levels.

Soybean Oil Declines by 4.44%

Soybean oil prices fell by 4.44%, driven by high production levels and weaker demand. This decline is favourable for trend followers as it is likely they have been holding short positions since the peak in August 2023. The persistent oversupply and reduced consumption have maintained the downward pressure on prices, aligning well with the strategies of those positioned to benefit from the ongoing bearish trend.

Global soybean production has been strong, with major producers like the U.S., Brazil, and Argentina reporting high yields. At the same time, demand from the biodiesel industry and food processing sectors has not kept pace, leading to an oversupply. The bearish trend in soybean oil prices is expected to continue unless there is a significant shift in either production or demand dynamics.

Conclusion

This week in trend has seen the TTU Trend Barometer improve to 48, by July 31 and the SG Trend Index slightly recover to -2.46% MTD, but uncertainty remains and geo-political events as well as key economic data being released at the moment, is incredibly volatile, which will continue to be reflected in the performance of Trend Followers until we see a less noisy environment.

Key Highlights:

Volatility Index: The VIX's sharp decline of 6.87% indicates reduced market uncertainty and a more stable investment landscape, fostering bullish sentiment in equity markets.
Commodities Mixed Performance: Sugar and rough rice saw notable increases, challenging trend followers with short positions, while canola's significant decline presented opportunities for maintaining bearish stances.
Equity Indexes: The Russell 2000's rise of 2.70% continues its bullish trend, driven by optimism around economic conditions and anticipated interest rate cuts.
Bonds: The 30-year bond's increase reflects a flight to safety amid economic uncertainties, suggesting a potential new upward trend.
Currencies: The Japanese Yen's 2.69% increase highlights shifts in global trade dynamics and investor sentiment, posing challenges for those holding short positions.

In the spirit of the Olympic Games, this week’s market movements can be likened to a series of competitive events where trend followers showcased their endurance, adaptability, and strategic prowess. The market opened with a strong start, reminiscent of a sprinter’s explosive beginning, only to face mid-week hurdles that tested resilience and strategy. By Wednesday's close, the markets demonstrated a robust finish, embodying the determined push of athletes nearing the finish line.

The week’s varied movements emphasize the importance of staying vigilant and adaptable. Trend followers must navigate these shifts with the precision and focus of an Olympian, ready to adjust strategies in response to emerging trends and market signals. As we move forward, economic data, central bank policies, and geopolitical events will continue to shape market dynamics, presenting both challenges and opportunities for traders.

Join us next week for another edition of “This Week in Trend,” where we will continue to explore the dynamic world of futures trading and provide insights to help you navigate these markets with confidence. Just like in the Olympics, a strategic mindset and adaptability will be your best allies in achieving success. Thank you for joining us, and we look forward to another exciting week in the futures markets!exciting week in the futures markets!

List of Resources used in the Week in Review

Important Disclaimers

This document and its contents are proprietary information of TTU and may not be reproduced or otherwise disseminated in whole or in part without TTU’s prior written consent.