Trend Following - Week in Review - December 13, 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.

"Tug of Trends: Will Bulls or Bears Deliver the Holiday Cheer?"

As of December 12, 2024, the SG Trend Index has posted a month-to-date (MTD) gain of 1.63%, lifting its year-to-date (YTD) performance to 2.79%. This marks a notable improvement from the prior week's YTD of 1.92%, underscoring that systematic traders are continuing to capitalize on December's pockets of favourable trading opportunities, even amid challenging conditions.

The TTU Trend Barometer has edged up to 41%, rising from last week's 36%, signalling a modest improvement in the overall trend environment. This shift suggests a slightly more favourable backdrop for trend-following strategies, although the overall quality of trends across markets remains relatively subdued.

The early December rally in key markets, particularly equities and soft commodities, has softened this week, dampening the enthusiasm sparked at the month’s start. Nonetheless, strong sector-specific trends persist, offering the potential for the SG Trend Index to close the year on a positive note.

As traders navigate this seasonal tug-of-war, the ultimate question looms: will the bulls or the bears deliver the holiday cheer as we approach Christmas? The outcome of this year-end battle will hinge on the persistence of these emerging trends and whether market conditions can maintain their momentum through the holiday season.

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, market activity exhibited varied dynamics across asset classes, influenced by seasonal patterns, geopolitical developments, and economic data releases. Here's a detailed overview:

Equities:

• Major Indices: The S&P 500 experienced a slight decline of less than 0.1%, closing at 6,051.09. The Dow Jones Industrial Average (DJIA) fell by 0.2% to 43,828.06, while the Nasdaq Composite edged up 0.1% to 19,926.72.
• Market Breadth: A notable divergence was observed, with the equal-weighted S&P 500 index declining by 2.5%, despite the S&P 500's modest 0.4% gain in December. This indicates that a small number of large-cap stocks are driving the index's performance, while the broader market faces challenges.

Fixed Income:

• 30-Year Treasury Bonds: Yields on 30-year U.S. Treasury bonds rose, reflecting ongoing inflation concerns and cautious central bank policies. The yield increased to approximately 4.58%, up from 4.53% the previous week.

Commodities:

• Energy:
  • Heating Oil: Prices surged by 6.27%, driven by colder weather forecasts increasing demand for heating fuels.
  • Natural Gas: Similarly, natural gas prices rose by 6.24% due to anticipated higher consumption amid lower temperatures.
• Agricultural:
  • Cocoa: Continued its bullish trend with a remarkable gain of 14.48%, attributed to supply constraints in major producing regions.
  • Lumber: Prices declined by 5.01%, reflecting a slowdown in construction demand, possibly due to seasonal factors and higher interest rates impacting housing starts.

Currencies:

• Japanese Yen (JPY): The yen weakened by 2.49% against the U.S. dollar, pressured by the Bank of Japan's dovish monetary policy stance and the dollar's strength amid expectations of U.S. interest rate hikes.

Volatility:

• VIX Index: The Cboe Volatility Index (VIX) increased by 1.85%, signalling growing investor caution amid turbulent equity markets and mixed economic signals.

This week's market movements were shaped by a combination of seasonal demand shifts, central bank policies, and geopolitical factors. Energy commodities benefited from weather-related demand increases, while equity markets faced pressure from weak earnings guidance and concerns over potential interest rate hikes. The divergence in market breadth highlights the uneven performance across sectors, underscoring the importance of selective investment strategies in the current environment.

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: +14.48%

Cocoa surged by an impressive 14.48% this week, cementing its position as one of the standout performers in the commodities market for 2024. This dramatic rise is underpinned by a combination of persistent supply constraints and robust global demand. The world’s leading cocoa producers, Côte d'Ivoire and Ghana, continue to grapple with declining yields, driven by aging tree stocks, adverse weather patterns, and the long-term impacts of the cocoa swollen shoot virus. These challenges have created a significant global supply deficit, fuelling upward pressure on prices.

On the demand side, the appetite for chocolate shows no signs of slowing down, with consumption in developed markets remaining strong and growth in emerging economies adding further strain to already tight supplies. Speculative activity has also played a role, with traders piling into cocoa in anticipation of further price increases, particularly as prices approach record highs. Currency fluctuations, including a weakening Ghanaian cedi, have further complicated export flows, adding to the bullish sentiment.

For trend followers, this week’s rally has been a clear win. Cocoa’s upward momentum throughout 2024 has consistently rewarded systematic traders who stayed disciplined and maintained long positions. The sustained trend highlights the value of systematic strategies, which are designed to capture outsized moves like this one. Traders employing breakout and momentum-based approaches are likely celebrating significant gains, as cocoa's rally continues to validate the principles of trend-following.

With prices now nearing record highs, cocoa has once again demonstrated its potential as a market that rewards those with the patience and discipline to ride persistent trends. It’s another reminder of why systematic traders view outliers like this as the cornerstone of their success.

Heating Oil: +6.27%

Heating oil posted a strong gain of 6.27% this week, fuelled by colder-than-expected weather forecasts and a seasonal uptick in demand. As winter grips the Northern Hemisphere, the need for heating fuels has increased, injecting fresh bullish sentiment into the market. This rally was further supported by tightening inventories and ongoing geopolitical uncertainties that continue to disrupt energy supply chains.

However, despite this week’s notable move, heating oil remains firmly entrenched in a broader bearish trend that has defined much of 2024. Structural factors, such as easing global energy prices and a slowdown in economic activity, continue to exert downward pressure on the commodity over the long term. This week’s surge, while eye-catching, represents more of an anomaly than a shift in the overall trend.

For trend followers, the sudden rally in heating oil likely created challenges. Many traders positioned to profit from the prevailing bearish trend may have faced losses or stop-outs as prices moved sharply against them. While moments like this are frustrating, trend-following strategies are built to withstand such counter-trend volatility, allowing traders to stay disciplined and ready to reengage with the broader trend as it reasserts itself.

This week’s price action highlights the inherent unpredictability of markets, reinforcing the importance of robust risk management and a long-term perspective in navigating temporary disruptions.capture.

Natural Gas: +6.24%

Natural gas surged by 6.24% this week, hinting at the potential beginnings of a bullish reversal after a prolonged period of bearish price action. The rally was driven by colder-than-expected winter weather forecasts, which have increased heating demand across the Northern Hemisphere. Seasonal factors played a significant role in the price movement, as tightening inventories in some regions further added to upward pressure on prices.

This week’s sharp rise also signals a possible shift in the long-term trend. The extended bear market that dominated much of 2023 and early 2024 appears to be losing momentum, with this rally breaching key resistance levels. Speculative interest has increased, as traders begin to position themselves for what could be the start of a more sustained upward move in natural gas. Given the market’s inherent volatility, further price gains are likely if temperatures continue to drop or supply chain disruptions emerge.

For trend followers, this week’s move represents a key turning point. Those who had been aligned with the bearish trend may have already scaled back or exited their short positions as signs of stabilization emerged in recent weeks. Now, with the sharp rally suggesting a potential breakout, systematic traders may begin to build long positions, anticipating a continuation of the nascent bullish momentum.

This shift in dynamics underscores the importance of adaptability in trend-following strategies. While the rally may have surprised those still positioned for a bearish market, the broader focus on aligning with emerging trends ensures that systematic traders are well-placed to capitalize if this upward trajectory gains further traction. Natural gas, with its reputation for volatility, remains a challenging yet potentially rewarding market for disciplined trend-followers.nd has propelled coffee prices upward, offering significant gains for trend-following traders attuned to these market dynamics.

Crude Oil WTI: +5.79%

Crude oil prices climbed by 5.79% this week, marking a bullish turn in line with movements across the broader energy complex. This rise was largely driven by expectations of tighter supplies, with OPEC+ reaffirming its production cut policies and signalling the possibility of further action to stabilize prices. In addition, colder seasonal temperatures in key energy-consuming regions have bolstered demand, adding to the upward pressure.

Despite this rally, crude oil remains within a broader trading range that has seen prices oscillate but not yet firmly break out into a sustained bullish trend. For the trend-following community, this week’s move is unlikely to have triggered long positions. Most systematic traders are likely still positioned short, given the broader bearish sentiment that has persisted throughout 2024. The spike, while notable, may simply be seen as a counter-trend correction rather than a definitive shift in market direction.

For trend followers, such moves emphasize the importance of maintaining discipline and waiting for clearer signals of a sustained breakout before repositioning. While the energy market’s short-term dynamics remain volatile, longer-term strategies will continue to monitor whether this rally signals the start of a more prolonged trend reversal or fades back into the existing range.

Gasoline RBOB: +4.72%

Gasoline RBOB rose by 4.72% this week, mirroring the broader recovery seen across the energy complex. The rally was fuelled by a combination of seasonal factors, such as increased demand for fuel during colder weather, and broader support from rising energy prices. Ongoing production cuts by OPEC+ have played a significant role in stabilizing the oil and refined products markets, contributing to the upward momentum observed this week.

However, despite this strong performance, gasoline remains firmly within a longer-term downtrend that has defined much of 2024. This week’s rise appears to be a short-term correction rather than a signal of a lasting bullish reversal. The movement reflects the energy market’s sensitivity to seasonal and geopolitical factors, but it stops short of marking a sustained shift in sentiment.

For trend followers, this week’s rally likely provided little cause for celebration. Most systematic traders remain aligned with the broader bearish trend and are unlikely to have transitioned to long positions based on this move alone. Gasoline’s price action underscores the need for patience and discipline in systematic trading strategies, where the focus remains on identifying and riding sustained trends rather than reacting to short-term volatility. As traders monitor the energy market, the question remains whether this rally will gather strength or fade back into the prevailing downtrend.

What’s Moving Down

Lumber: -5.01%

Lumber prices dropped by 5.01% this week, deepening the sharp bearish trend that has taken hold in recent weeks. The decline reflects ongoing challenges in the housing and construction sectors, where rising interest rates and higher borrowing costs have significantly reduced demand for new home builds. With mortgage rates remaining elevated, construction activity has slowed, leading to weaker demand for building materials like lumber.

At the same time, earlier increases in production by lumber suppliers, responding to previously high prices, have now resulted in an oversupplied market. This imbalance, coupled with the seasonal winter slowdown in construction projects, has added further downward pressure on prices, driving this week’s notable drop.

For trend followers, the continued weakness in lumber is likely a welcome development. Many systematic traders would have already positioned short as the bearish trend became more pronounced, and this week’s movement only reinforces their strategies. Lumber’s price action is a clear example of how trend-following approaches can align with long-term market dynamics, allowing traders to ride the momentum of a sustained decline. As the bear trend persists, disciplined traders remain well-placed to capitalize on further downside.

Sugar: -4.95%

Sugar prices dropped by 4.95% this week, signalling a potential return to the broader bearish trend after a period of heightened volatility. The market has been challenging to trade, with erratic price movements creating uncertainty for traders. This week’s sharp decline appears to reflect improving supply conditions in key producing regions, alongside a tapering of seasonal demand.

In Brazil, the world’s largest sugar producer, favourable weather has led to stronger-than-expected yields, boosting global supply. Additionally, India’s sugar exports, which had been restricted earlier this year, are beginning to stabilize, easing fears of a global shortage. With these supply-side improvements and reduced speculative activity, sugar’s recent upward pressure has begun to dissipate, resulting in this week’s significant pullback.

For trend followers, sugar continues to be a difficult market to navigate. The frequent reversals in price action have likely tested the resolve of systematic traders. However, this week’s move may offer some clarity, as the sharp decline aligns with the bearish trend seen earlier in the year. Systematic traders will likely view this as an opportunity to re-engage short positions if the downward momentum persists. In such a volatile environment, maintaining discipline and a long-term perspective remains crucial, as sugar’s unpredictable nature continues to demand a cautious approach.nd-following traders seeking to capitalize on significant market movements.

Russell 2000: -3.72%

The Russell 2000 experienced a sharp decline of 3.72% this week, dampening the bullish optimism that had been building following the U.S. election. As a key barometer for small-cap stocks and broader risk sentiment, the index’s pullback reflects growing concerns about the sustainability of its recent rally. With the holiday season approaching, this downturn has cast a shadow over what had been a promising year-end outlook.

Several factors contributed to the decline, including heightened uncertainty surrounding interest rate policies and mixed economic data that left investors cautious. Additionally, profit-taking after the index’s recent highs likely played a role, as market participants sought to lock in gains before the year’s end. The combination of these elements created headwinds for the Russell 2000, which had previously been buoyed by optimism around fiscal stimulus and economic recovery.

For trend followers, the abrupt drop likely disrupted positions aligned with the index’s earlier bullish momentum. While the reversal may have triggered some stop-outs, systematic traders will remain focused on the broader trend. If the bullish trajectory reestablishes itself, there remains potential for further gains.

This week’s decline highlights the inherent volatility of equity markets and the importance of maintaining discipline during periods of correction. Though the move is disappointing for those anticipating a year-end rally, it also serves as a reminder that markets often follow a winding path, requiring patience and adaptability to navigate effectively.ng strategic adjustments to align with the evolving market conditions.

Coffee: -3.66%

Coffee prices fell by 3.66% this week, marking a sharp and unwelcome reversal for trend followers who had been capitalizing on the market’s strong bullish trajectory. In recent months, coffee has been a standout performer, with prices climbing steadily due to persistent supply constraints and robust global demand. However, this week’s downturn interrupts that momentum, casting uncertainty on whether the bullish trend will reassert itself.

The decline seems to be driven in part by profit-taking, as traders lock in gains following coffee’s rapid ascent. Additionally, improved weather conditions in major producing countries like Brazil and Vietnam have eased immediate concerns about supply shortages, offering some relief to the market. While demand remains strong, particularly from emerging markets, this week’s pullback suggests that bullish sentiment has softened, at least temporarily.

For trend followers, this move has likely been a frustrating development. Many systematic traders had aligned their strategies with coffee’s sustained uptrend, and the abrupt reversal may have triggered stop-losses or eaten into profits. Despite this, the broader fundamentals supporting coffee’s price strength remain largely intact. If supply challenges resurface or demand continues to outpace expectations, the bullish trend may resume, offering renewed opportunities for trend-following strategies. For now, this pullback serves as a reminder of the volatility inherent in even the most promising markets.

30 Year Bond: -3.22%

The 30-Year Bond experienced a significant decline of 3.22% this week, signalling a potential reversion to its long-standing bearish trend. After a period of relative stagnation, this move suggests that downward momentum may be regaining strength, fuelled by lingering concerns over inflation and the trajectory of interest rates.

Market participants appear to be reacting to signals that central banks remain committed to maintaining restrictive monetary policies in the face of stubborn inflationary pressures. This has contributed to increased yields on long-duration bonds, driving prices lower. The bond market's response highlights ongoing scepticism about the prospects for an imminent pivot toward looser monetary conditions.

For trend followers, this week's decline may represent a welcome resumption of bearish momentum in a market that had shown signs of consolidation. Traders aligned with the longer-term downtrend could see this move as an opportunity to reinforce their positions or re-enter the market after a period of reduced activity. However, with continued uncertainty around inflation and monetary policy, caution remains warranted as the market’s direction could be influenced by upcoming economic data and central bank communications.

Conclusion

As we approach the close of 2024, this week's market movements serve as a vivid reminder of the unpredictability and dynamism that define financial markets. From cocoa’s meteoric rise to the ongoing tug-of-war in the energy complex, traders are grappling with both opportunities and challenges across asset classes. The holiday season has historically brought volatility, and this year is proving to be no different, with sector-specific trends defying broader market sentiment.

The SG Trend Index’s steady improvement this month highlights the resilience of systematic trend-following strategies, which thrive on capturing outsized moves like those seen in cocoa and natural gas. The rise in the TTU Trend Barometer to 41% suggests a modestly improving trend environment, providing a glimmer of optimism for traders. However, challenges remain, as markets continue to present mixed signals, testing the discipline and patience of even the most seasoned trend followers.

As the seasonal tug-of-war between bulls and bears intensifies, it’s clear that the outcome for the year will hinge on how these trends evolve in the final weeks. Will the bullish momentum in key sectors prevail, or will bearish pressures reassert themselves, forcing traders to recalibrate for the new year? Regardless of the outcome, this week underscores the importance of staying disciplined, adaptable, and focused on the long-term game—a hallmark of successful trend-following strategies.

For traders, the question remains: will the bulls deliver the holiday cheer, or will the bears leave coal in their stockings? With the TTU Trend Barometer pointing to gradually improving conditions, the coming weeks promise to keep markets—and traders—on their toes as we close out another dynamic year in financial markets.

List of Resources used in the Week in Review

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