Trend Following - Week in Review - December 27, 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 Strong Finish to the Year: Trends Heat Up as 2024 Ends"

As we near the end of 2024, markets are delivering a mixed bag of opportunities and challenges for trend followers. The TTU Trend Barometer is showing marginal improvement, and while some strong idiosyncratic Outliers have reversed, diversified trend portfolios are holding steady as we close out the year.

SG Trend Index and TTU Trend Barometer Performance:

• TTU Trend Barometer: Climbed to 52%, up from last week’s 50%, signalling a slightly stronger trend environment.
• SG Trend Index (as of 26 Dec 2024):
  • MTD: +1.88%
  • YTD: +3.04%
  • A slight decline from last week's MTD (+2.17%) and YTD (+3.34%) readings.

The TTU Trend Barometer indicates improving trend conditions, akin to a warming thermometer in the middle of winter—just in time for year-end evaluations.

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.

Volatility Index (VIX Futures):

The VIX futures shed -7.18% this week, reflecting a decrease in immediate market anxiety. However, reversals in Cocoa, Orange Juice, and Coffee reminded trend followers to remain vigilant, as these Outliers have been key drivers of trend-following success in 2024.

Weekly Asset Class Snapshot

Source: Finwiz.com

As the year winds down, traders are adjusting positions with mixed signals across asset classes. Here’s how the key sectors performed:

Currencies (-0.55%): The U.S. dollar softened slightly but maintained its strength against major peers. This modest decline reflects profit-taking and a cautious stance on further monetary policy developments.

Volatility Index (-7.18%): The VIX saw a significant decline, reflecting reduced immediate market anxiety. This move comes despite continued uncertainty over macroeconomic policy, suggesting a temporary pause in hedging activity as traders adjust for the year-end.

Grains (+0.09%): Grains markets remained relatively flat, reflecting a balance between global supply improvements and muted demand expectations. Seasonal influences and stable weather conditions in key growing regions contributed to the subdued activity.

Meats (+0.40%): Modest gains in meats suggest steady demand and limited disruptions to supply chains, a reassuring sign for the agricultural sector heading into the holiday season.

Bonds (-0.51%): Bond prices edged slightly lower, with yields remaining pressured by expectations of further Federal Reserve tightening in 2025. The fixed-income market continues to grapple with hawkish sentiment, limiting gains.

Energy (+1.20%): The Energy sector posted notable gains, driven by a rebound in crude oil prices. Ongoing geopolitical tensions and supply concerns in major production hubs bolstered market sentiment, highlighting the fragility of global energy markets.

Metals (-0.72%): Metals experienced a pullback, with gold and silver leading the decline. A resilient U.S. dollar and a shift in risk appetite contributed to reduced safe-haven demand, despite ongoing macroeconomic uncertainty.

Soft Commodities (-2.83%): Soft commodities, including cocoa and coffee, declined as profit-taking and supply dynamics weighed on recent gains. These markets remain volatile but are expected to recover with seasonal demand trends.

Equity Indexes (+0.68%): Equity indexes saw modest gains, reflecting a recovery in sentiment despite broader economic concerns. This movement is likely driven by selective repositioning as investors look toward 2025.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

Lumber: +3.95%

Lumber prices have exhibited significant volatility in recent times, with a notable increase of 3.95% this week. This fluctuation is influenced by various factors, including supply constraints, demand dynamics, and broader economic conditions.

In the week ending December 13, 2024, the Madison's Lumber Prices Index reported a decrease to US$494 per thousand board feet, down 3% from the previous week. This decline was attributed to thinning supply as the year-end approached, with sawmills managing order files toward mid-December in anticipation of holiday closures. Despite the reduced supply, market activity remained steady, contributing to price fluctuations.

From a trend-following perspective, the lumber market's recent behaviour presents challenges. The 3.95% price increase, while notable, occurs within a context of overall volatility and lack of clear directional movement. Trend-following strategies typically seek sustained price trends to establish positions confidently. However, the current erratic price movements in the lumber market may not provide the necessary confirmation for such strategies.

As a result, many trend followers might opt to remain on the sidelines, awaiting more definitive signals of a sustained trend before committing to positions in the lumber market. This cautious approach helps mitigate the risks associated with entering a market characterized by unpredictable price swings and ensures alignment with the core principles of trend-following methodologies.

Natural Gas: +3.15%

Natural gas prices have experienced a 3.15% increase this week, continuing a nascent bullish trend that has garnered attention from market participants. This upward movement is influenced by several factors, including increased demand due to colder weather, supply constraints, and broader energy market dynamics.

Recent reports indicate that the European Union is depleting its gas storage at the fastest rate since the 2021 energy crisis, driven by colder weather and reduced seaborne imports. From the end of September to mid-December, gas storage dropped by about 19%, compared to single digit drops in the previous two years. This rapid depletion has raised concerns about supply adequacy, contributing to upward pressure on natural gas prices.

Additionally, the U.S. Energy Information Administration (EIA) has raised its Henry Hub natural gas spot price forecast for 2024 and 2025, reflecting expectations of increased demand and tighter supply conditions. The EIA now projects the Henry Hub spot price to average $2.19 per million British thermal units (MMBtu) in 2024 and $2.95 per MMBtu in 2025, up from previous forecasts.

From a trend-following perspective, the current price movement in natural gas presents a compelling opportunity. The 3.15% increase aligns with the early stages of a bullish trend, suggesting potential for further appreciation. Trend followers, who seek to capitalize on sustained market movements, are likely participating in this uptrend with increased commitment. The combination of supportive fundamental factors and positive price action provides the necessary confirmation for trend-following strategies to engage more assertively in the natural gas market.

Nikkei 225: +3.13%

The Nikkei 225 has experienced a 3.13% increase this week, continuing its upward trajectory and signalling positive momentum for trend-following investors. This rise contributes to the index's strong performance in 2024, positioning it for its highest year-end close since 1989.

Several factors have contributed to this bullish trend. Notably, corporate deals, such as the Honda and Nissan megamerger, have boosted investor confidence. Additionally, increased shareholder returns and a favourable environment for exports, supported by a weak yen, have further propelled the index. Despite foreign investors being net sellers in 2024, the Nikkei has risen by over 21% since January, indicating robust domestic investment activity.

From a trend-following perspective, the sustained upward movement of the Nikkei 225 presents a compelling opportunity. The consistent gains and positive market sentiment provide the necessary confirmation for trend-following strategies to maintain or increase their long positions in this market. The alignment of technical indicators with favourable economic developments supports continued participation in this bullish trend.

Soybean Meal: +2.88%

Soybean meal prices have experienced a 2.88% increase this week, prompting analysis on whether this movement signifies a mere retracement within an ongoing bearish trend or indicates a potential trend reversal.

Recent data from the U.S. Department of Agriculture (USDA) suggests a bearish outlook for soybean meal prices. The USDA's December 2024 World Agricultural Supply and Demand Estimates (WASDE) report forecasts the season-average soybean meal price at $300 per short ton, a reduction of $20 from the previous month. This adjustment reflects expectations of ample global supplies and competitive export markets.

Additionally, the USDA projects a nearly 20% decrease in the average price of soybean meal for the 2024/2025 crop year, attributing this decline to increased competition from Southern Hemisphere producers, despite anticipated strong usage.

From a trend-following perspective, the recent 2.88% price increase may be interpreted as a short-term retracement within the broader bearish trend. Trend-following strategies typically rely on sustained price movements to confirm trend reversals. Given the prevailing bearish fundamentals and the USDA's projections, this week's uptick is likely seen as a temporary correction rather than an indication of a trend reversal.

Therefore, trend followers may maintain their short positions in soybean meal, awaiting more substantial evidence of a sustained upward movement before considering a shift in their trading stance.

Wheat: +2.72%

Wheat prices have risen by 2.72% this week, a movement that may be unfavourable for trend-following investors currently holding short positions. However, this increase does not appear substantial enough to indicate a reversal of the prevailing bearish trend.

Recent analyses suggest that the global wheat market is expected to tighten over the 2024/25 season, with ending stocks projected to fall by 3.3% year-on-year to less than 258 million metric tons—the lowest level since the 2015/16 season. Despite this anticipated tightening, Chicago Board of Trade (CBOT) wheat prices have continued to experience downward pressure throughout the year.

Additionally, the U.S. Department of Agriculture's December 2024 Wheat Outlook reports that the all-wheat season-average farm price remains unchanged at $5.60 per bushel, based on current prices and expectations for the remainder of the marketing year.

From a trend-following perspective, the recent 2.72% uptick is likely viewed as a minor retracement within the ongoing bearish trend. Trend-following strategies typically require more significant and sustained price movements to confirm a trend reversal. Given the current market fundamentals and the relatively modest nature of this week's price increase, it is probable that trend followers will maintain their short positions, awaiting more definitive signals before adjusting their strategies.

What’s Moving Down

Cocoa: -17.38%

Cocoa prices have experienced a sharp reversal, declining by 17.38% this week. This downturn is particularly unfavourable for trend-following investors who have maintained long positions in this commodity, especially given cocoa's previous status as a strong performer in 2024.

The recent price surge in cocoa, with increases exceeding 24% earlier in December, was largely attributed to supply constraints in major producing regions like Ghana and Ivory Coast. Adverse weather conditions, including strong winds and low rainfall, disrupted harvests, leading to significant price hikes. For instance, cocoa prices surpassed $11,000 per ton amid concerns of insufficient supply to meet the festive demand from chocolatiers.

However, the subsequent steep decline suggests a market correction, possibly due to improved weather conditions or adjustments in market sentiment. Such high volatility introduces challenges for trend-following strategies, as rapid reversals can lead to potential losses and increased uncertainty.

Given the current market dynamics, trend followers may need to exercise heightened caution and consider implementing robust risk management practices to navigate the unpredictable terrain ahead.

Oats: -8.97%

Oats have experienced a significant decline of 8.97% this week, intensifying the bearish trend observed throughout 2024. This downturn is largely attributed to a combination of increased production and decreased demand.

In 2024, the oat market sought stability following a period of volatility. Record high prices and seeded acres in 2022 led to a dramatic decline in prices and production in 2023. Acres were expected to increase in 2024, with oats looking relatively profitable compared to most other crops. However, despite these expectations, prices have continued to decline, with oats decreasing 17.10% since the beginning of 2024.

From a trend-following perspective, this pronounced decline may signal a continuation of the bearish trend. Trend followers, who typically capitalize on sustained market movements, might interpret this sharp drop as an opportunity to either initiate or reinforce short positions, anticipating further price depreciation. However, the volatility inherent in the oats market necessitates cautious risk management to mitigate potential reversals or unexpected market shifts.

In summary, the substantial decrease in oats prices this week underscores the challenges within the market, with trend followers likely viewing this as a continuation of the existing bearish trend, while remaining vigilant for any signs of market stabilization or reversal.

VIX Futures: -7.18%

The VIX Futures often referred to as Wall Street's "fear gauge," declined by 7.18% this week, indicating a reduction in market volatility expectations. While trend-following strategies typically do not trade the VIX directly, it serves as a crucial barometer for investor sentiment, particularly concerning U.S. equities.

A decreasing VIX suggests that investors anticipate a more stable market environment, which can influence the performance of trend-following models. Lower volatility often corresponds with smoother price trends, potentially enhancing the effectiveness of trend-following strategies. Conversely, a rising VIX reflects increased market uncertainty and potential disruptions in established trends, posing challenges for these models.

Therefore, monitoring the VIX provides trend followers with valuable insights into market sentiment and potential volatility, aiding in risk assessment and strategy adjustments.

Platinum: -3.39%

Platinum prices have declined by 3.39% this week, continuing a downward trend observed in recent months. This decline is attributed to a combination of factors, including a broad-based sell-off across commodities markets following the U.S. election and reduced concerns regarding potential mine supply disruptions from Russia.

Trend-following traders, who typically seek to capitalize on sustained market movements, may find the current price congestion in the platinum market challenging. The recent price decline could be interpreted as a potential breakdown to the downside, signalling the possibility of a new bearish trend. However, given the lack of clear directional movement, many trend followers might prefer to remain on the sidelines until more definitive signals emerge, indicating a sustained trend in either direction.

While the recent decline in platinum prices suggests potential for a bearish trend, the current market congestion may lead trend-following traders to exercise caution and await clearer market signals before committing to positions.

Orange Juice: -2.83%

Orange juice prices experienced a 2.83% decline this week, an unfavourable move for trend followers who have benefited from the commodity's sustained bull trend throughout 2024. This decline introduces a measure of volatility into what has been a consistently upward trajectory, leading to potential challenges for those heavily positioned on the long side.

The long-term rally in orange juice prices has been driven by persistent supply constraints, including adverse weather conditions such as hurricanes in Florida, and the ongoing impact of citrus greening disease affecting crops in both Florida and Brazil. These factors have severely limited production, creating a tight supply environment that propelled prices to record highs earlier this year.

This week's pullback, however, may suggest a temporary pause or retracement rather than a full reversal of the bullish trend. While the fundamental drivers of high prices remain intact, the sharp price movement introduces uncertainty, particularly for trend-following strategies reliant on smooth, sustained trends. For systematic traders, this correction may result in reduced confidence or forced position adjustments, highlighting the challenges of navigating such volatile conditions.

Trend followers will likely remain cautious, monitoring for further signs of either a continuation of the correction or a resumption of the bullish trend. The broader narrative for orange juice remains one of constrained supply and strong demand, but this week’s price action serves as a reminder of the inherent risks in even the strongest trending markets.

Conclusion

As 2024 comes to a close, the futures markets have delivered a fitting finale—marked by volatility, trend reversals, and resilience. This week encapsulated the year's prevailing theme: the delicate balance between opportunity and risk for trend followers. The TTU Trend Barometer’s rise to 52% reflects a favourable trend environment, but sharp reversals in key markets like cocoa, orange juice, and coffee served as stark reminders of the unpredictability inherent in financial markets.

For trend followers, 2024 has been a year defined by outliers—those rare and powerful market moves that underscore the importance of systematic approaches. The SG Trend Index's modest YTD gain of 3.04% illustrates the challenges of capturing these opportunities while navigating volatile and often contradictory signals across asset classes. Yet, the enduring strength of diversified trend-following strategies has remained evident, proving their capacity to weather turbulent markets.

This final report for 2024 is not just a summary of the week’s events but a reflection on the year as a whole. It has been a year where persistence, discipline, and an unwavering commitment to process rewarded those who stayed the course. Whether riding the meteoric rise of orange juice or navigating the challenging reversals in cocoa, trend followers have demonstrated the resilience required to thrive in an ever-changing market landscape.

As we bid farewell to 2024, we do so with gratitude for the lessons learned and excitement for the opportunities ahead. Here’s to a 2025 filled with new trends, outliers, and the enduring power of systematic trading. Thank you for joining us on this journey, and we look forward to navigating the markets together in the year to come. Happy New Year!

List of Resources used in the Week in Review

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