Trend Following - Week in Review - December 06, 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.

"Stocking Stuffers: December's Trends Deliver – 6 December 2024"

As of December 5, 2024, the SG Trend Index has achieved a month-to-date (MTD) gain of 0.77%, elevating its year-to-date (YTD) performance to 1.92%. This marks a notable improvement from the previous week's YTD of 0.92%, indicating a favourable environment for trend-following strategies as December commences.

However, the TTU Trend Barometer has declined to 36 from last week's 41, suggesting a softening in the overall trend environment. Despite this, certain sectors continue to present significant opportunities for systematic traders.

In the broader market, U.S. stocks have reached record highs, with the S&P 500 closing at 6,086.49, marking its 56th record high of the year. This surge is attributed to strong economic data and investor optimism.  Additionally, Bitcoin has surpassed the $100,000 mark, reaching up to $103,853 on December 4, 2024. This milestone is driven by increased mainstream adoption and a more favourable regulatory environment under the new administration. These developments underscore the dynamic nature of the current market landscape, offering both challenges and opportunities for trend-following strategies as we progress through December.

The Top Traders Unplugged (TTU) Trend Barometer is a proprietary tool that measures the percentage of markets with medium to strong trends. Similar to a thermometer, where 0 degrees Celsius equates to freezing, a TTU Trend Barometer reading below 40% indicates a “cold” environment for trend-following, while readings above 55% signal a “hotter,” more favourable trend environment

Weekly Asset Class Snapshot

This week’s market activity displayed varied dynamics across asset classes, shaped by a mix of strong economic data, shifting geopolitical conditions, and ongoing seasonal trends as the year draws to a close.

• Equities: Global equity markets continued their upward momentum, buoyed by optimism surrounding robust corporate earnings and solid economic data. Investors responded positively to signs of resilience in key economies, with developed markets showing strength and emerging markets benefiting from improving risk sentiment. Seasonal tailwinds, such as year-end portfolio adjustments and the so-called "Santa Claus rally," added to the positive performance. However, there were pockets of vulnerability in some sectors where valuations remain a concern.
• Fixed Income: The bond market saw subdued activity, with slight gains in long-duration bonds reflecting cautious optimism around inflation stabilization and potential central bank policy pivots. Yields retreated slightly from recent highs as investors weighed mixed signals from central bank commentary on future rate adjustments. Despite this, demand for fixed-income assets remained steady, particularly among risk-averse investors seeking safe-haven opportunities amid broader market uncertainties.
• Commodities: Commodity markets experienced contrasting movements:
  • Energy: Crude oil and natural gas prices fell as supply concerns eased, following improved production levels and geopolitical tensions stabilizing. Seasonal shifts in demand also weighed on prices, particularly in natural gas, where mild weather forecasts tempered the usual winter rally.
  • Agriculture: Soft commodities like coffee and cocoa continued to benefit from weather-related supply challenges and geopolitical disruptions in key production regions. These trends provided ongoing opportunities for systematic strategies focused on capturing directional momentum.
  • Metals: Industrial metals saw mixed performance, with stronger demand in some areas offset by concerns over slowing global manufacturing activity. Precious metals remained under pressure as a stronger U.S. dollar reduced their appeal.
• Currencies: Currency markets were marked by moderate movements, with the U.S. dollar continuing to display resilience against major counterparts. This strength reflected investor confidence in the U.S. economy and a divergence in monetary policy stances between the Federal Reserve and other central banks. Meanwhile, select emerging market currencies saw gains as risk appetite improved globally.
• Volatility: Market volatility declined further, with key indicators reflecting reduced uncertainty. This drop was driven by stabilizing equity markets and improved economic conditions, though some caution remains as investors assess the sustainability of recent trends.

This week underscored the evolving interplay of economic, geopolitical, and seasonal drivers shaping asset class performance. Equity markets continued their rally, supported by robust fundamentals and year-end optimism. Fixed income markets showed resilience as inflation fears eased, while commodity markets remained a tale of two halves, with energy prices retreating and soft commodities surging on supply concerns. Currency movements mirrored diverging economic trajectories and central bank policies, while volatility levels suggested a period of relative calm.

As December progresses, the overall trend environment appears to be softening, as indicated by the Trend Barometer's dip. However, the persistence of strong trends in select asset classes, particularly in soft commodities and equities, provides fertile ground for systematic trading strategies.trading strategies.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

Canola: +6.01%

Canola prices experienced a notable increase of 6.01% this week, a movement that may have posed challenges for trend-following traders who had established bearish positions in line with the commodity's prolonged downward trend.

Causative Drivers:

• Surging Vegetable Oil Prices: In November, global food prices reached a 19-month high, significantly influenced by a 7.5% rise in the vegetable oil index. This surge was driven by lower-than-expected palm oil output due to excessive rainfall in Southeast Asia, which in turn elevated prices for related oils, including canola.
• Supply Chain Disruptions: In September, workers at six major grain terminals in Vancouver went on strike, potentially disrupting Canada's canola exports during a critical harvesting period. Although negotiations resumed, the strike highlighted vulnerabilities in the supply chain, contributing to price volatility.
• Chinese Import Reductions: Chinese buyers have reduced Canadian canola imports due to concerns over potential anti-dumping duties from Beijing, leading to a significant decline in shipments from December onward. This reduction in demand could have complex effects on prices, potentially contributing to volatility.

Chart Interpretation and Trend-Follower Perspective:

The recent 6.01% price increase represents a significant deviation from canola's long-term bearish trend. Trend-following traders, who typically capitalize on sustained price movements, may have found this abrupt upward shift unfavourable, especially if they were holding short positions. The sudden price rise could have triggered stop-loss orders or necessitated position adjustments, leading to potential losses.

In summary, the interplay of rising vegetable oil prices, supply chain disruptions, and shifts in international trade dynamics has contributed to the recent volatility in canola prices.

Cocoa: +4.90%

Cocoa prices experienced a significant surge of 4.90% this week, continuing a robust upward trend that has been advantageous for trend-following traders capitalizing on this substantial outlier.

Causative Drivers:

• Structural Supply-Demand Shortfalls: The cocoa market is confronting a notable supply deficit due to declining global production. Poor harvests in major producing countries, particularly Ivory Coast and Ghana, have exacerbated this shortfall. Factors such as aging tree stocks, the spread of the cocoa swollen shoot virus (CSSV), and adverse weather conditions linked to the El Niño phenomenon have significantly impacted yields. The International Cocoa Organization (ICCO) has reported a 14.2% drop in global cocoa production for the 2023/24 season, leading to the lowest cocoa stocks in 22 years.

Chart Interpretation and Trend-Follower Perspective:

This week’s 4.90% gain is a continuation of cocoa’s extraordinary bullish trend throughout 2024, reflecting one of the largest outliers in recent commodity market history. For trend-following traders, this surge exemplifies the power of staying aligned with strong, persistent trends. Traders who have maintained long positions have likely enjoyed exceptional returns, as cocoa has demonstrated a near-uninterrupted upward trajectory fuelled by deep market imbalances.

The chart highlights how systematic strategies, focused on capturing long-term momentum, are ideally positioned to benefit from such sustained movements. The continued strength of this rally underscores the importance of trend-followers’ discipline in holding positions during prolonged uptrends.

In summary, cocoa’s price surge this week reflects ongoing supply constraints and structural market imbalances. For systematic traders, this market remains a standout performer and a prime example of the “once-in-a-lifetime” opportunities that trend-following strategies aim to capture.

Coffee: +3.87%

Coffee prices rose by 3.87% this week, continuing a significant bullish trend that has been a major contributor to 2024 performance.

Causative Drivers:

• Adverse Weather Conditions: Poor weather in Brazil and Vietnam, the world's largest coffee producers, has led to reduced yields, contributing to the highest coffee prices in nearly 50 years.
• Supply Chain Disruptions: Global supply chain issues, including shipping disruptions, have further tightened coffee availability, impacting prices.
• Increased Demand: Growing coffee consumption among younger populations, especially in emerging markets, has bolstered demand, supporting higher prices.

Chart Interpretation and Trend-Follower Perspective:

The 3.87% price increase this week reinforces the strong bullish trend observed throughout 2024. Trend-following traders, who capitalize on sustained price movements, have likely found this favourable, as the consistent uptrend aligns with their strategies. The chart indicates a series of higher highs and higher lows, characteristic of a robust upward trend, providing profitable opportunities for those maintaining long positions.

The combination of adverse weather, supply chain disruptions, and increased demand has propelled coffee prices upward, offering significant gains for trend-following traders attuned to these market dynamics.

DAX: +3.75%

The DAX index experienced a robust increase of 3.75% this week, marking a significant milestone as it surpassed the 20,000-point threshold for the first time.

Causative Drivers:

• Optimism Surrounding U.S. Economic Policies: The re-election of President Donald Trump has generated positive sentiment in the German stock market. Investors anticipate that the administration's policies, including potential tax cuts and deregulation, will stimulate economic growth, thereby benefiting global markets.
• Monetary Policy Expectations: The European Central Bank (ECB) is expected to implement further interest rate cuts in response to declining inflation rates. Such monetary easing is generally supportive of equity markets, as lower interest rates reduce borrowing costs and encourage investment.
• Favourable Currency Movements: A stronger U.S. dollar coupled with a weaker euro has enhanced the competitiveness of European exporters, including those listed on the DAX. This currency dynamic has bolstered the earnings prospects of export-oriented companies, contributing to the index's rise.

Chart Interpretation and Trend-Follower Perspective:

The DAX's ascent past the 20,000-point mark signifies a continuation of its upward trajectory, characterized by higher highs and higher lows—a classic indicator of a strong bullish trend. For trend-following traders, this movement aligns with their strategies, as maintaining long positions in such a trending environment typically yields favourable returns. The sustained momentum suggests that the current trend remains robust, encouraging traders to uphold their positions in anticipation of further gains.

The DAX's 3.75% increase this week reflects a confluence of positive factors, including investor optimism regarding U.S. economic policies, expectations of accommodative monetary policy from the ECB, and advantageous currency movements. These elements have collectively fostered a favourable environment for trend-following traders, who have benefited from the index's persistent bullish trend.

Ethanol: +3.49%

Ethanol prices increased by 3.49% this week, a movement that may have been unfavourable for trend-following traders holding short positions in line with the commodity's prior bearish trend.

Causative Drivers:

• Government Policy Changes: The Indian government is considering raising ethanol procurement prices by ₹2-5 per liter to boost biofuel supplies, aiming for a 20% ethanol blending target by 2025-26. This policy shift is expected to increase demand for ethanol, thereby supporting higher prices.
• Supply Constraints: In Brazil, ethanol prices dipped despite elevated demand due to production costs and market dynamics. However, the global ethanol market has faced supply constraints, contributing to price volatility.
• Rising Production Costs: In the U.S., increased corn prices, the primary feedstock for ethanol, have elevated production costs, leading to higher ethanol prices. Additionally, heightened energy costs, particularly for natural gas used in ethanol production, have further contributed to escalating production expenses.

Chart Interpretation and Trend-Follower Perspective:

The 3.49% price increase this week represents a notable deviation from ethanol's recent bearish trend. Trend-following traders, who typically capitalize on sustained price movements, may have found this abrupt upward shift unfavourable, especially if they were holding short positions. The sudden price rise could have triggered stop-loss orders or necessitated position adjustments, leading to potential losses.

Government policy changes, supply constraints, and rising production costs have contributed to the recent uptick in ethanol prices. For trend-following traders, this unexpected movement underscores the importance of adaptive risk management strategies to navigate sudden market shifts.

What’s Moving Down

Natural Gas: -7.64%

Natural gas prices declined by 7.64% this week, a movement that likely resulted in unfavourable outcomes for trend-following traders who had positioned themselves to capitalize on the recent bullish momentum.

Causative Drivers:

• Mild Weather Forecasts: Recent forecasts predict milder temperatures across key regions, reducing the anticipated demand for heating and, consequently, for natural gas. This shift has led to a decrease in prices as the market adjusts to lower consumption expectations.
• Elevated Inventory Levels: Natural gas storage levels remain higher than the five-year average, indicating a well-supplied market. The ample supply has exerted downward pressure on prices, as the urgency for additional procurement diminishes.
• Volatility Due to Contract Expiry: The expiration of December contracts introduced volatility, with traders adjusting positions, leading to price fluctuations. Such periods often result in increased market activity that can drive prices down.

Chart Interpretation and Trend-Follower Perspective:

The 7.64% decline this week represents a significant reversal from the preceding bullish trend. Trend-following traders, who typically seek to profit from sustained price movements, may have experienced whipsaw effects due to this abrupt downturn. The sharp decline likely triggered stop-loss orders or necessitated rapid position adjustments, leading to potential losses.

The combination of milder weather forecasts, elevated inventory levels, and contract expiry-related volatility contributed to the sharp decline in natural gas prices. For trend-following traders, this unexpected reversal underscores the challenges of navigating volatile markets and highlights the importance of robust risk management strategies.

VIX Futures: -4.05%

The Cboe Volatility Index (VIX), commonly referred to as Wall Street's "fear gauge," declined by 4.05% this week, reaching levels around 13.34 as of December 2, 2024. This marks a significant decrease, bringing the VIX to its lowest point since early 2023.

Causative Drivers:

• Robust U.S. Economic Performance: The U.S. economy continues to exhibit strong growth, with the Atlanta Federal Reserve's GDPNow model projecting a 3.2% growth rate for the current quarter.
• This positive economic outlook has bolstered investor confidence, contributing to reduced market volatility.
• Anticipation of Federal Reserve Rate Cuts: Market participants expect the Federal Reserve to implement another interest rate cut, which has further stabilized market sentiment and decreased demand for protective options, leading to a lower VIX.
• Post-Election Market Stability: Following the U.S. presidential election, the VIX has declined, indicating a healthy stock rally. Historically, a VIX below its long-term average of approximately 19.5 suggests favourable conditions for sustained market stability.

Trend-Follower Perspective:

While the VIX itself is not typically a direct trading instrument for trend-following strategies, its current low levels are indicative of a stable and less volatile market environment. For trend-followers, such conditions can present challenges, as reduced volatility may lead to fewer pronounced and sustained market trends, potentially impacting the performance of trend-following models.

The VIX's decline to historically low levels reflects a confluence of robust economic growth, anticipated monetary easing, and post-election stability. While this environment fosters investor confidence, it may also result in a less favourable landscape for trend-following traders seeking to capitalize on significant market movements.

Lumber: -3.31%

Lumber prices decreased by 3.31% this week, potentially signalling the end of the previous bullish trend that trend-following traders may have been capitalizing on.

Causative Drivers:

• Decline in Housing Starts: The U.S. housing market has experienced a slowdown, with a 5.5% decline in housing starts reported in May. This reduction in new construction activity has lessened demand for lumber, contributing to the recent price decline.
• Elevated Mortgage Rates: Rising mortgage rates, now at 6.84%, have dampened new construction activity, reducing demand for building materials like lumber. This decrease in demand has exerted downward pressure on lumber prices.
• Supply Chain Adjustments: In response to previous high demand and prices, lumber producers increased output. However, with the current slowdown in construction, the market is experiencing an oversupply, leading to price reductions.

Chart Interpretation and Trend-Follower Perspective:

The 3.31% price decline this week indicates a potential reversal of the prior bullish trend. Trend-following traders, who typically seek to profit from sustained price movements, may interpret this downturn as a signal to reevaluate or exit long positions. The shift suggests that the upward momentum in lumber prices is waning, prompting traders to adjust their strategies accordingly.

The recent decrease in lumber prices is influenced by a slowdown in the housing market, rising mortgage rates, and supply chain dynamics. For trend-following traders, this development may indicate the conclusion of the previous bullish trend, necessitating strategic adjustments to align with the evolving market conditions.

Palladium: -3.16%

Palladium prices declined by 3.16% this week, continuing a downward trend that has been favourable for trend-following traders holding short positions.

Causative Drivers:

• Shift in Automotive Demand: The automotive industry, a major consumer of palladium for catalytic converters, is increasingly substituting palladium with platinum due to cost considerations. This transition has reduced demand for palladium, contributing to its price decline.
• Elevated Stockpiles: High inventory levels of palladium have created an oversupplied market, exerting downward pressure on prices.
• Weakening Industrial Demand: Beyond the automotive sector, industrial demand for palladium has softened, further impacting its market value.

Chart Interpretation and Trend-Follower Perspective:

The consistent decline in palladium prices aligns with the strategies of trend-following traders who have established short positions. The sustained downtrend has provided opportunities to capitalize on the bearish movement, reinforcing the effectiveness of trend-following approaches in this context.

The ongoing decrease in palladium prices, driven by shifts in automotive demand, high stockpiles, and weakening industrial use, has created a favourable environment for trend-following traders positioned to benefit from the downtrend.

Heating Oil: -2.80%

Heating oil prices declined by 2.80% this week, continuing a downward trend that has been favourable for trend-following traders holding short positions.

Causative Drivers:

• OPEC+ Production Decisions: OPEC+ has delayed planned production increases, extending current output cuts until the end of 2026. This decision reflects concerns over weak global demand, particularly from China, and aims to stabilize prices amid potential oversupply.
• Ample Supply Levels: Despite production cuts, global oil inventories remain sufficient, contributing to downward pressure on heating oil prices. The International Energy Agency anticipates a slight surplus in the oil market in 2024, even with extended OPEC+ cuts.
• Seasonal Demand Variations: Heating oil demand is typically higher during colder months. However, warmer-than-average temperatures, partly due to El Niño, have reduced the need for heating, leading to lower demand and contributing to price declines.

Chart Interpretation and Trend-Follower Perspective:

The consistent decline in heating oil prices aligns with the strategies of trend-following traders who have established short positions. The sustained downtrend has provided opportunities to capitalize on the bearish movement, reinforcing the effectiveness of trend-following approaches in this context.

In summary, the ongoing decrease in heating oil prices, driven by OPEC+ production decisions, ample supply levels, and seasonal demand variations, has created a favourable environment for trend-following traders positioned to benefit from the downtrend.

Conclusion

As we progress through December, this week's market dynamics provided a vivid snapshot of the evolving landscape in futures trading. The SG Trend Index's MTD gain of 0.77% and YTD performance improvement to 1.92% highlight a favourable, albeit softening, trend-following environment. While the TTU Trend Barometer's dip to 36 signals a cooler market environment, pockets of strength in equities and soft commodities showcase the continued potential for systematic trading strategies.

This week, the equity markets surged to record highs, driven by robust economic data and optimism around U.S. fiscal and monetary policies. Commodities, however, told a more nuanced story, with sharp divergences across asset classes. Soft commodities like coffee and cocoa continued their bullish streak, supported by weather-induced supply constraints, while energy markets like natural gas and heating oil declined, reflecting eased geopolitical concerns and seasonal demand adjustments.

The top movers revealed the diverse opportunities and challenges faced by trend-following traders. From cocoa's extraordinary bull run to palladium and heating oil's favourable bearish trends, systematic traders have navigated both surges and reversals. However, unexpected movements, such as the abrupt rise in canola or the sharp decline in natural gas, underscored the importance of adaptive risk management and disciplined strategy execution in volatile markets.

As the year-end approaches, the interplay of macroeconomic drivers, geopolitical developments, and seasonal influences will likely shape the final trading days of 2024. For trend-followers, this environment underscores the core principles of discipline, adaptability, and a long-term perspective—key attributes that ensure resilience in navigating the ever-changing currents of the global markets.

We look forward to analysing the continued evolution of these trends in the weeks ahead as traders close the books on another eventful year.

List of Resources used in the Week in Review

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