Trend Following - Week in Review - December 20, 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.

"A Not-So-Merry Market: No Christmas Rally in Sight"

As the holiday season approaches, the anticipated "Santa Claus Rally" seems to have taken a detour, leaving traders with stockings emptier than expected. The U.S. futures markets have experienced notable turbulence, influenced by several key events and indicators.

Federal Reserve's Policy Shift

The Federal Reserve's recent decision to cut interest rates by 0.25 percentage points to a target range of 4.25%-4.50% was accompanied by a hawkish outlook for 2025. This stance has heightened market uncertainty, contributing to increased volatility in U.S. futures markets.

Triple-Witching Event

The final triple-witching of 2024, occurring on December 20, added to market jitters. This event, where stock options, index options, and index futures expire simultaneously, typically leads to increased trading activity and volatility. The December 20 event followed a significant stock sell-off, further amplifying market fluctuations.

SG Trend Index and TTU Trend Barometer Performance

As of December 18, 2024, the SG Trend Index reported a month-to-date gain of 2.17%, bringing the year-to-date performance to 3.34%. However, with the chaos of the last two trading days, don’t expect this trend to remain favourable in the Dec 20 update.

The TTU Trend Barometer, a measure of the overall trend environment, registered a reading of 50% as of December 20, indicating a strong trend presence but like the markets, this too could be as slippery as Santa's chimney towards year end.

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.

Market Volatility Indicators

The CBOE Volatility Index (VIX), often referred to as the market's "fear gauge," has shown significant fluctuations. On December 18, 2024, the VIX closed at 27.62, reflecting increased market anxiety.

Implications for Traders

The convergence of these factors has led to a complex trading environment. The anticipated year-end rally has been overshadowed by policy shifts and market mechanics, resulting in heightened volatility. Traders are advised to exercise caution and remain vigilant, as the usual holiday market calm appears elusive this year.

Weekly Asset Class Snapshot

Source: Finwiz.com

This week's movements highlight a highly volatile market environment driven by macroeconomic concerns and specific supply-demand factors. Traders are adjusting their positions as the end of the year approaches, with no clear signs of a "Santa Claus Rally" in sight. The volatility across asset classes signals caution for market participants heading into the holiday season.

Volatility Index (+16.38%): The Volatility Index (VIX) surged significantly this week, reflecting heightened market anxiety as traders grappled with Federal Reserve policy changes and a lack of year-end optimism. The spike in the VIX indicates a sharp increase in hedging activity and uncertainty over near-term market direction.

Grains (-2.37%): Grains markets experienced a notable decline, with bearish sentiment fuelled by improved weather conditions in major growing regions. This week's movements highlight the sensitivity of agricultural markets to supply dynamics, which saw an easing of concerns over crop shortages.

Meats (-0.55%): Meats displayed modest declines, largely stable compared to other commodities. The movement suggests minimal disruptions in supply chains and steady demand heading into the holiday season.

Bonds (-0.74%): Bond prices edged slightly lower as yields remained pressured by a hawkish Federal Reserve. The anticipation of further rate adjustments in 2025 has limited bond market gains, although the broader fixed-income space continues to draw investor interest due to its relative safety.

Energy (+1.20%): The Energy sector ticked upward, supported by a rebound in crude oil prices as geopolitical tensions and supply concerns in major producing regions bolstered market sentiment. This movement underscores the continued fragility of global energy supply chains.

Metals (-2.06%): Metals saw a pullback, with gold and silver leading the decline as the U.S. dollar remained resilient. Safe-haven demand waned slightly this week, reflecting a short-term shift in risk appetite amid fluctuating market conditions.

Soft Commodities (+1.26%): Soft commodities posted modest gains, supported by price increases in cocoa and coffee. The demand for these goods remains resilient, particularly as supply disruptions and seasonal patterns affect market dynamics.

Equity Index (-2.56%): Equity indexes suffered notable declines as investor sentiment turned sour amidst a flurry of rate policy concerns and a year-end market sell-off. The S&P 500 and Nasdaq saw sharp declines, with traders bracing for further potential downside.

• Federal Reserve Policy: The Federal Reserve's decision to cut interest rates by 0.25 percentage points to a target range of 4.25%-4.50%, coupled with a hawkish outlook for 2025, introduced uncertainty, leading to fluctuations in equity markets.

• Triple-Witching Event: The simultaneous expiration of stock options, index options, and index futures on December 20 heightened trading activity and contributed to market volatility.

Currencies (-0.83%): The U.S. dollar softened slightly but maintained its strength relative to most major currencies. The slight decline reflects profit-taking after recent highs, as well as cautious positioning ahead of further monetary policy developments.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

VIX Futures: +16.38%

The VIX futures, often dubbed the "fear gauge," surged by 16.38% this week, reflecting a sharp increase in market uncertainty and risk aversion. This spike aligns with heightened concerns over macroeconomic developments, including the Federal Reserve's hawkish stance despite a rate cut and broader worries about liquidity as the year draws to a close. The triple-witching event this week, a phenomenon involving the simultaneous expiration of stock options, index options, and index futures, also contributed to elevated volatility, amplifying the move in the VIX.

The chart highlights a significant upward move, reminiscent of other periods where volatility spiked sharply in response to unexpected market turbulence or investor repricing of risk. While trend followers may not trade VIX futures directly, the sharp move serves as an important market sentiment gauge. For trend-following strategies, heightened volatility often coincides with expanded price ranges in other markets, creating opportunities or challenges depending on the direction and strength of existing trends.

This week's surge in the VIX underscores the fragility of market sentiment and the importance of maintaining disciplined processes. For systematic traders, such environments may require adjustments in risk exposure, particularly as heightened volatility tends to ripple across asset classes. As seen in the chart, previous spikes in the VIX often marked turning points or periods of adjustment in broader markets, signalling potential opportunities or caution ahead.

Natural Gas: +14.3%

Natural Gas experienced a robust 14.3% rally this week, signalling the emergence of a strong bull trend after a prolonged period of price consolidation. This move appears to be driven by multiple factors, including early signs of colder-than-expected winter weather forecasts across key consumption regions in the Northern Hemisphere and supply disruptions in European energy markets, where geopolitical tensions remain a concern. Additionally, the ongoing recalibration of global energy supplies following earlier sanctions on Russian exports continues to underpin bullish sentiment.

The chart illustrates a pivotal breakout from the range-bound trading that has dominated much of the year, with prices showing clear upward momentum. This rally marks a shift in sentiment for Natural Gas, which has largely been under pressure since its significant peaks in 2022. The current move could signal the early stages of a longer-term bull trend, particularly as seasonal demand increases, and supply remains constrained.

For trend followers, particularly those employing short to medium-term models, this week’s breakout represents a lucrative opportunity. Early entries into this emerging trend would have captured a significant portion of the upward move, showcasing the strength of systematic approaches in identifying and riding such trends. The rapid ascent also highlights the value of maintaining exposure across diversified markets, as the Natural Gas trend may offset potential drawdowns in less volatile or declining markets. As the trend develops, systematic strategies will likely continue to add to positions, maximizing the potential for returns as the bull run unfolds.

Lumber: +5.56%

Lumber climbed 5.56% this week, continuing its volatile streak and proving to be a challenging market for trend-followers. This recent uptick appears to be influenced by a combination of seasonal factors and supply-demand imbalances in the housing market. Demand for lumber typically rises in anticipation of building and renovation activity in the upcoming spring season, even as current inventory levels remain constrained. Additionally, recent declines in U.S. mortgage rates have provided a glimmer of hope for housing activity, lending support to lumber prices.

The chart underscores the erratic nature of lumber's price movements, with sharp reversals and limited sustained directional trends in recent months. While this week's rally may seem to suggest a potential upward trajectory, the broader picture reflects a whipsaw environment where enduring momentum has been elusive. For trend-following models, particularly those requiring consistent directional moves to capitalize on trends, lumber's behaviour poses a significant challenge. Traders who entered on earlier signals may find themselves vulnerable to abrupt reversals, resulting in stop-outs or losses.

The current conditions highlight the importance of adaptability and diversification in trend-following strategies. While lumber's volatility may disrupt models reliant on smoother trends, maintaining exposure across more predictable markets could offset the adverse effects. Until clearer momentum emerges, lumber remains a market demanding caution and disciplined risk management for systematic traders.

Cocoa: +5.03%

Cocoa surged 5.03% this week, adding to what has been an extraordinary run for one of the year’s standout performers. Continuing its climb to fresh highs, cocoa has been a trend-follower's dream market in 2024, offering exceptional profits for those seeking to ride the bucking bronco. This latest move reflects both ongoing supply constraints and robust global demand, which show no signs of abating as the year comes to a close.

The fundamentals behind cocoa's bullish trajectory remain strong. Concerns about weather-related disruptions in West Africa, the largest cocoa-producing region, have kept supply under pressure. Additionally, reports of lower-than-expected production volumes, coupled with resilient consumer demand for chocolate in key markets, have created a tight supply-demand dynamic that continues to favour higher prices. The chart showcases a textbook example of long-term trend development, with prices consistently pushing higher over the past year.

For trend-followers, cocoa exemplifies the value of adhering to systematic models that capitalize on sustained price trends. The market’s ability to consistently surprise on the upside has provided ample opportunities for strategies that allow profits to run. While the magnitude of the rally may raise questions about whether the trend is overextended, there is little evidence of a reversal at this stage. Systematic traders will likely continue to hold positions as long as the upward momentum persists, making cocoa a prime example of how patience and process can yield significant rewards in trending markets.

Orange Juice: +3.31%

Orange Juice added 3.31% this week, continuing its stellar bull run that has made it one of the most consistent and rewarding markets for trend followers over the past several years. Like cocoa, orange juice has delivered sustained gains, becoming a dominant outlier in trend-following portfolios. The market has demonstrated remarkable resilience, with its upward trajectory firmly intact, rewarding those who have maintained their positions through systematic strategies.

The fundamental drivers of orange juice's rally remain robust. Adverse weather conditions, including hurricanes and extreme heat in Florida—one of the largest orange-producing regions—have significantly impacted citrus crop yields. Compounding this, diseases like citrus greening continue to plague production, further tightening global supply. Meanwhile, demand has remained steady, driven by consumer preferences for health-conscious beverages, creating a favourable supply-demand imbalance that has fuelled prices higher.

The chart paints a picture of a classic long-term bull trend, characterized by consistent higher highs and higher lows. For trend followers, this market represents the epitome of opportunity, as models designed to capture extended trends have reaped the rewards of orange juice’s relentless rally. Despite the substantial gains, there are no clear signs of a reversal, making it likely that systematic strategies will continue to ride this trend until evidence suggests otherwise. Orange juice, alongside cocoa, stands as a shining example of the power of outliers to drive portfolio performance, reaffirming the importance of diversification and disciplined process in trend-following systems.

What’s Moving Down

Soybean Oil: -7.21%

Soybean Oil fell sharply this week, posting a 7.21% decline and continuing its well-established bear trend. For trend-followers, this move aligns perfectly with existing models that have been capturing the downside momentum in this market. The consistency of this bearish trajectory offers a textbook example of how systematic strategies can thrive when markets sustain clear directional trends.

The fundamental factors driving this decline include easing global supply concerns and weakening demand in key markets. Improved weather conditions in major soybean-producing regions, particularly in South America, have bolstered crop yields, leading to increased availability of soybean oil. Additionally, the overall decline in energy prices has lessened the pressure on biofuel demand, which often underpins soybean oil prices. These factors have collectively maintained a downward trajectory in prices, which has now extended into late December.

The chart reflects a smooth, prolonged bearish trend with few significant countertrend rallies, providing an ideal environment for trend-following strategies. Systematic traders employing medium to long-term models have likely benefited greatly from this sustained move, with the current decline further reinforcing the trend's strength. Unless supply-demand dynamics shift dramatically, the bearish trend in soybean oil appears poised to persist, making it a key contributor to trend-following profits in the soft commodities sector.

Rough Rice: -6.14%

Rough Rice dropped by 6.14% this week, marking the emergence of a potential short trend that could be favourable for trend-following models, particularly those employing short to medium-term time horizons. This recent move comes amid easing concerns about global rice supply constraints that had driven prices higher earlier in the year. Increased production output in major rice-exporting nations, including Thailand and Vietnam, coupled with stabilizing demand, has applied downward pressure on prices.

The chart highlights the initial signs of a bearish trend forming, as Rough Rice continues to trade below its recent highs. The market has shifted from the consolidation phase seen earlier in the year toward more pronounced directional movement, which creates opportunities for systematic traders to capitalize on the emerging trend.

For trend-followers, this development is a positive signal. Short to medium-term models are well-positioned to capture these early stages of the downtrend, benefiting from the sustained price pressure that could follow. However, given rice's occasional tendency for sharp countertrend rallies due to weather or geopolitical factors, disciplined risk management remains crucial. This week’s decline suggests that Rough Rice may become an increasingly significant contributor to trend-following portfolios as the short trend gains momentum.

Sugar: -5.84%

Sugar declined by 5.84% this week, continuing a volatile bear trend that presents both challenges and opportunities for trend-following strategies. The market’s recent movements reflect ongoing fluctuations in global supply and demand dynamics. Improved weather conditions in Brazil, the world's largest sugar producer, have boosted cane harvest yields, alleviating earlier fears of supply shortages. Additionally, declining energy prices have softened the demand for ethanol, a key alternative use for sugarcane, further pressuring prices.

The chart reveals a market characterized by pronounced swings, with short-term volatility making it difficult to trade for models that require tighter stop-loss thresholds or smoother trends. However, for medium to long-term trend-following systems, this environment still offers potential, provided the models are designed to "wear loose pants" — allowing them to absorb the inherent noise without being prematurely stopped out.

For systematic traders, sugar's behaviour underscores the importance of adapting models to suit the idiosyncrasies of specific markets. While the bear trend remains intact, its jagged nature necessitates looser parameters to capture the broader directional movement effectively. As the market continues to digest supply improvements and fluctuating demand, sugar may still provide profitable opportunities for trend-followers with the patience and flexibility to ride out its erratic price action.

Russell 2000: -4.57%

The Russell 2000 declined by 4.57% this week, marking a significant retracement that highlights the challenging environment for equities and, in particular, trend followers exposed to this segment of the market. The sharp downturn comes amid broader concerns about the Federal Reserve's hawkish tone on monetary policy and uncertainty surrounding economic growth heading into 2025. Small-cap stocks, represented by the Russell 2000, are especially sensitive to economic sentiment and tighter financial conditions, which added to the downside pressure.

The chart showcases a market that had been pushing higher earlier in the year, only to be met with a pronounced pullback in recent days. This week's move likely caught trend followers off guard, as the retracement disrupted what had appeared to be a developing upward trend. For systematic traders, the Russell 2000's sharp reversal highlights the inherent risks of equity markets, where sudden shifts in sentiment can result in adverse moves even within broader uptrends.

This week's performance epitomizes the headwinds faced by equities, where volatility and unpredictability have been key themes. Trend-following models with tighter stops may have been particularly vulnerable, with many likely stopped out as the retracement unfolded. For those with looser parameters, the week underscores the importance of diversified exposure across asset classes to mitigate the risks of abrupt equity drawdowns. As the Russell 2000 grapples with a volatile landscape, traders will need to rely on discipline and process to navigate these choppy waters effectively.

Palladium: -4.39%

Palladium fell 4.39% this week, extending its ongoing bearish trend and providing further opportunities for trend-followers who have been riding the downward momentum. This sustained weakness in palladium prices is reflective of changing industrial dynamics and shifting demand-supply fundamentals. The metal, heavily used in catalytic converters for automobiles, continues to face pressure as demand wanes amid slowing global auto sales and increasing adoption of electric vehicles, which do not require palladium in their production.

Additionally, easing supply concerns from Russia, a major producer of palladium, have alleviated upward price pressures that once fuelled the metal's significant rallies in previous years. As alternative materials and technologies reduce reliance on palladium, the metal has faced a consistent headwind that has kept prices trending downward.

The chart illustrates a steady decline in palladium prices, with lower highs and lower lows reinforcing the bear trend. For trend-followers, this market has been highly favourable, particularly for those employing medium to long-term models that are well-suited to capturing extended downtrends. This week’s drop further validates the effectiveness of systematic approaches in identifying and profiting from such sustained trends. As the bearish trajectory shows no clear signs of reversal, palladium remains an attractive opportunity for trend-following strategies to capitalize on further downside potential.

Conclusion

This week was undeniably defined by the sharp equities retracement in the final days, catching many off guard and highlighting the unpredictable nature of financial markets. Yet, amid this volatility, trend followers have continued to thrive, capitalizing on well-established trends, particularly in the commodities sector. Cocoa, orange juice, and soybean oil have delivered impressive opportunities, reaffirming the value of systematic strategies that focus on riding outliers.

And as for Santa, well, it seems even he has been affected by the current climate! Rumour has it he’s gone on strike this year, citing recent industrial relations reforms as the last straw. Apparently, delivering infinite gifts while adhering to new labour laws was too much to handle! So, if your stockings are empty this Christmas, blame it on Santa’s union representative.

On a lighter note, wishing all of you a very Merry Christmas and a prosperous New Year! Here’s to navigating markets with discipline, humour, and a touch of holiday cheer. See you next week!

List of Resources used in the Week in Review

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