Trend Following - Week in Review - August 16, 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.

“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.

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.

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: -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

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