Trend Following - Week in Review - August 23, 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.

“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

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