Trend Following - Week in Review - August 09, 2024

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.

“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.

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 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

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