Trend Following - Week in Review - February 21, 2025

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.

"Markets Struggle Amid Whipsaws: Trend Followers Face a Difficult Week"

This week, trend-followers encountered renewed challenges as markets remained fragmented, with false breakouts and sharp reversals making sustained trends difficult to capture. While energy markets showed signs of strength, equities reversed their recent gains, and metals and soft commodities faced continued pressure. Volatility surged, reflecting heightened uncertainty and making trend execution particularly challenging. As always, patience and disciplined risk management remain essential in navigating these turbulent conditions.

• TTU Trend Barometer:
  • This week: 25% (Last week: 35%)
  • 10-day rate of change: Declining

The drop in trend strength highlights a difficult trading environment, with markets struggling to establish sustained directional movement. Such conditions often lead to increased choppiness and false signals, requiring traders to exercise caution.

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

Source: Finwiz.com

As we conclude the third week of February 2025, asset classes exhibited increased divergence, reflecting heightened market volatility. Equities reversed their previous gains, while energy rebounded sharply. The Volatility Index (VIX) saw a notable increase, indicating renewed uncertainty across financial markets. Meanwhile, soft commodities and metals continued to struggle, reinforcing the choppy trading environment that has challenged trend-followers in recent weeks.

Below is a detailed breakdown of asset class performance compared to the previous week:

• Equities: -2.15% (Previous week: +1.60%)
  • Equity markets retreated after a strong rally, weighed down by:
    • Disappointing earnings guidance from key corporate players.
    • Rising geopolitical tensions, dampening investor sentiment.
    • Profit-taking and rotation into defensive assets.
  • The pullback reflects a fragile sentiment as investors reassess risk exposure.
• Energy: +2.04% (Previous week: -0.80%)
  • Energy markets bounced back as:
    • Supply constraints emerged, with production cuts in major oil-producing regions.
    • Improved demand forecasts lifted sentiment, particularly in Asian markets.
    • Geopolitical factors further supported crude oil prices.
• Metals: -1.42% (Previous week: +1.20%)
  • Precious and industrial metals lost ground due to:
    • A strengthening U.S. dollar, pressuring commodity prices.
    • Weakening global manufacturing data, reducing demand for base metals.
    • Profit-taking in gold and silver, following recent gains.
• Grains: +0.50% (Previous week: -0.50%)
  • Grain markets posted slight gains on:
    • Weather-related concerns, impacting key agricultural regions.
    • Improved export activity, with global trade flows stabilizing.
• Meats: -1.71% (Previous week: -1.20%)
  • The meats sector continued its downward trajectory as:
    • Weak consumer demand persisted, leading to oversupply.
    • Rising feed costs pressured producer margins, limiting profitability.
• Soft Commodities: -3.18% (Previous week: -2.50%)
  • Soft commodities remained under pressure, led by declines in:
    • Cocoa, facing a sharp correction after record highs.
    • Coffee, pressured by increased global supply projections.
  • The sector's continued weakness highlights the difficulty of maintaining stable trends.
• Currencies: +0.16% (Previous week: -0.29%)
  • The U.S. dollar strengthened, weighing on commodity markets.
  • The Euro declined, following dovish European Central Bank (ECB) remarks.
• Volatility Index (VIX Futures): +4.14% (Previous week: -0.21%)
  • The VIX saw a sharp increase as:
    • Equities turned lower, increasing hedging demand.
    • Market uncertainty grew, pushing investors toward defensive positioning.
• Bonds: +0.24% (Previous week: +0.34%)
  • Bond markets remained in demand as:
    • Investors sought safe-haven assets amid equity market fluctuations.
    • Yields declined slightly, reflecting sustained demand for fixed-income securities.

Conclusion

This week’s market movements highlight the continued complexity of trend-following conditions:

• Equities reversed course, frustrating long positions after prior strength.
• Energy rebounded, offering opportunities amid supply constraints.
• Soft commodities continued their decline, reinforcing negative trends in agricultural markets.
• Volatility surged, reflecting growing investor uncertainty.

The combination of choppy price action and increased market dispersion underscores the challenges facing trend-followers. As systematic traders navigate these conditions, maintaining risk discipline and process adherence remains essential. Staying selective and focusing on emerging opportunities will be key to capitalizing on shifting market 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

Natural Gas: +17.6%

Natural gas prices have surged by 17.6% this week, continuing the bullish momentum observed in recent weeks.

Causal Factors:

1. Severe Winter Weather: An Arctic blast has gripped significant portions of the United States, leading to increased demand for heating and causing production challenges due to well freeze-offs.
2. Supply Constraints: Despite a recent increase in active natural gas rigs, overall production has not kept pace with heightened demand.
3. Geopolitical Influences: The European Union's efforts to reduce dependence on Russian gas by seeking alternative suppliers, including the U.S., have influenced global natural gas markets.

Trend-Following Perspective:

• Short-Term Models: The recent price surge presents potential opportunities for short-term trend-following strategies to capitalize on the upward momentum.
• Medium- to Long-Term Models: While the current uptrend is notable, medium- to long-term trend followers should seek confirmation of sustained momentum before adjusting positions.

The combination of severe winter weather, supply constraints, and geopolitical factors has contributed to the significant rise in natural gas prices. Trend followers should monitor these developments closely to inform their trading strategies.

Oats: +5.93%

Oats experienced a modest price increase of 5.93% this week; however, the market remains in a congestion phase, which may not present clear opportunities for trend-following strategies.

Causal Factors:

1. Supply Dynamics: Recent reports indicate a potential increase in oat acreage in 2025, particularly in Canada and the European Union. This anticipated rise in supply could exert downward pressure on prices, contributing to the current congestion phase.
2. Demand Fluctuations: The global oat market has experienced a slowdown in trading volume, with declines ranging from 5% to 12% in various regions. This reduction in demand, especially in breakfast cereals and snack bars, may be influencing the lack of a clear price trend.

Trend-Following Perspective:

• Short-Term Models: Given the current congestion phase, short-term trend-following models may find limited opportunities, as the market lacks decisive directional movement.
• Medium- to Long-Term Models: These models might also exercise caution, awaiting more definitive signals of a sustained trend before committing to positions.

While oats have seen a slight price uptick, the prevailing market congestion suggests that trend-following strategies may need to remain on the sidelines until clearer trends emerge.

VIX Futures: +4.14%

The CBOE Volatility Index (VIX) futures rose by 4.14% this week, yet the index remains at relatively low levels.

Causal Factors:

1. Geopolitical Uncertainty: Recent geopolitical events, including unexpected policy announcements and international tensions, have introduced elements of uncertainty into the market, leading to a slight uptick in volatility expectations.
2. Economic Data Releases: Upcoming economic reports and central bank meetings have heightened investor caution, contributing to increased demand for protective options and a corresponding rise in the VIX.

Trend-Following Perspective:

• Market Sentiment Indicator: While VIX futures are not typically traded by trend followers, the index serves as a valuable gauge of market sentiment. The recent increase, despite remaining at low levels, suggests a slight elevation in investor anxiety, which may influence risk management and position sizing decisions across various trading strategies.

The notable movements in natural gas and oats prices, alongside the modest rise in VIX futures, reflect a complex interplay of supply-demand dynamics, seasonal factors, and geopolitical uncertainties. Trend followers are advised to assess these developments within the context of their specific trading horizons and risk management frameworks.

Sugar: +3.91%

Sugar prices have risen by 3.91% this week, a movement that may be unfavourable for trend-following strategies, especially for those holding bearish positions.

Causal Factors:

1. Supply Constraints:
   • Early Closure of Indian Sugar Mills: In India, over three dozen sugar mills in key cane-producing states have ceased operations earlier than usual—nearly two months ahead of schedule—due to reduced cane availability from adverse weather conditions. This premature shutdown suggests that India's sugar production will fall short of initial estimates, leading to a 10% increase in local sugar prices over the past month.
2. Global Production Challenges:
   • Adverse Weather in Brazil: Brazil, a leading sugar producer, has faced drought and fires, particularly in São Paulo, damaging sugar crops and tightening global supply.
   • Climate Impact on Asian Crops: Unusually dry weather, linked to El Niño, has adversely affected sugar harvests in Asian countries, contributing to global
3. Policy Decisions:
   • Export Restrictions: India plans to extend its sugar export ban to boost local supplies and increase ethanol production, further constraining global supply

Trend-Following Perspective:

• Short-Term Models: The recent price increase may prompt short-term trend followers to reassess bearish positions, considering potential reversals or reduced exposure.
• Medium- to Long-Term Models: Those with longer horizons should monitor these supply-side developments closely. While the current uptrend challenges bearish positions, confirmation of sustained upward momentum is necessary before adjusting strategies.

The combination of early mill closures in India, adverse weather conditions in major producing regions, and policy-induced export restrictions has led to a tightening of global sugar supplies, contributing to the recent price increase. Trend followers, particularly those with bearish positions, should carefully evaluate these factors and consider potential strategy adjustments in response to evolving market conditions.

Soybean Oil: +1.89%

Soybean oil prices have increased by 1.89% this week, a movement that may be unfavourable for trend-following strategies, particularly those holding bearish positions. This uptick could signal a potential shift in the prevailing bearish trend.

Causal Factors:

1. Policy Changes in Major Importing Countries:
   1. India's Import Tax Adjustments: India is considering raising import taxes on vegetable oils to support local oilseed farmers facing declining domestic prices. This policy shift could reduce imports of soybean oil, tightening global supply and exerting upward pressure on prices.
2. Global Supply Dynamics:
   1. Production Challenges in South America: Adverse weather conditions, such as droughts in Argentina, have led to reduced soybean yields, impacting the availability of soybean oil in the global market.
3. Shifts in Import Patterns:
   1. India's Reduced Palm Oil Imports: In January, India's palm oil imports dropped to a 14-year low, with refiners opting for cheaper soybean oil. This shift in demand dynamics has influenced soybean oil prices.

Trend-Following Perspective:

• Short-Term Models: The recent price increase may prompt short-term trend followers to reassess bearish positions, considering potential reversals or reduced exposure.
• Medium- to Long-Term Models: Those with longer horizons should monitor these developments closely. While the current uptick challenges bearish positions, confirmation of sustained upward momentum is necessary before adjusting strategies.

Policy changes in major importing countries, global supply challenges, and shifts in import patterns have contributed to the recent rise in soybean oil prices. Trend followers, especially those with bearish positions, should carefully evaluate these factors and consider potential strategy adjustments in response to evolving market conditions.

What’s Moving Down

Cocoa: -9.78%
Cocoa prices have experienced a sharp decline of 9.78% this week, a significant reversal that poses challenges for trend-following strategies that have been capitalizing on the prior bullish trend. The market is currently exhibiting heightened volatility.

Causal Factors:

• Demand Concerns:
  • High Prices Impacting Consumption: The recent surge to record-high cocoa prices has raised concerns about potential demand destruction. Major chocolate manufacturers, such as Hershey Co. and Mondelez International Inc., have indicated that sustained high cocoa costs may lead to reduced consumer demand, as higher product prices could deter purchases.
• Market Dynamics:
  • Futures Market Inversion: The cocoa futures market has experienced an inversion, where current spot prices exceed future contract prices. This unusual market structure complicates hedging strategies for large manufacturers, increasing uncertainty and contributing to price volatility.
• Supply Chain Challenges:
  • Hedging Cost Increases: In top producer Ivory Coast, sales of the upcoming season's harvest have slowed. The previous price rally led exchanges to raise margin requirements, making it more expensive for traders to hedge purchases and affecting the pace of trade.

Trend-Following Perspective:

• Short-Term Models: The abrupt price drop may trigger exit signals for short-term trend followers who had been riding the bullish wave, prompting a reassessment of positions to mitigate potential losses.
• Medium- to Long-Term Models: Those with longer investment horizons should closely monitor the evolving market conditions. The recent volatility and reversal necessitate caution, as the sustainability of the prior uptrend is now in question. Confirmation of a new trend direction is advisable before making significant portfolio adjustments.

The recent decline in cocoa prices is primarily driven by demand concerns amid high prices, complex market dynamics, and supply chain challenges. Trend-following strategies must adapt to the increased volatility and potential trend reversals, exercising diligent risk management in this uncertain environment.he underlying factors influencing long-term trends.

Orange Juice: -8.91%

Orange juice prices have experienced a significant decline of 8.91% this week, marking a strong bearish movement that may benefit short-term trend followers capitalizing on the downturn. This shift indicates a potential end to the prior bullish environment.

Causal Factors:

1. Supply Chain Recovery:
   • Improved Production in Brazil: Brazil, the world's largest exporter of orange juice, has seen a recovery in its orange production following previous declines due to adverse weather and disease. This resurgence has increased global supply, contributing to the recent price decrease.
2. Demand Dynamics:
   • Declining Consumption Trends: Global consumption of orange juice has been on a downward trend, influenced by competition from alternative beverages and consumer concerns over sugar content. This sustained decrease in demand applies downward pressure on prices.
3. Market Corrections:
   • Adjustment from Previous Highs: Prior to this decline, orange juice prices had reached record highs due to supply shortages and increased production costs. The current price drop may represent a market correction as supply conditions improve and demand remains subdued.

Trend-Following Perspective:

• Short-Term Models: The recent bearish movement offers potential opportunities for short-term trend followers to capitalize on the downward momentum.
• Medium- to Long-Term Models: Those with longer investment horizons should exercise caution, as the recent decline may signal a reversal of the previous bullish trend. Confirmation of sustained bearish momentum is advisable before adjusting positions.

The notable decrease in orange juice prices is influenced by a combination of supply chain recovery, declining consumption, and market corrections. Trend followers should closely monitor these developments to inform their trading strategies.

Lean Hogs: -5.32%

Lean hog prices have declined by 5.32% this week, reflecting ongoing volatility and the absence of a clear trend in the market.

Causal Factors:

1. Profit-Taking Activities:
   • Following a period of gains, traders engaged in profit-taking, especially as the market approached contract highs earlier in the week. This selling pressure contributed to the recent price decline.
2. Decline in Pork Cutout Values:
   • The U.S. Department of Agriculture reported a decrease in the wholesale pork carcass cutout value, with significant drops in pork belly prices. This reduction in cutout values has negatively impacted lean hog futures.
3. Seasonal Supply Variations:
   • Seasonal fluctuations in hog supplies can influence price volatility. Changes in farrowing rates and slaughter numbers during different times of the year

Trend-Following Perspective:

• Short-Term Models: The current market volatility presents challenges for short-term trend followers, as rapid price fluctuations can trigger false signals and complicate position management.
• Medium- to Long-Term Models: The absence of a clear directional trend suggests that medium- to long-term trend followers may prefer to remain on the sidelines until more definitive patterns emerge, reducing the risk of whipsaw losses.

The lean hog market is characterized by volatile swings and a lack of clear trends, influenced by profit-taking, declining pork cutout values, and seasonal supply variations. Trend-following strategies should exercise caution in such an environment, carefully evaluating risk before entering positions.

Coffee: -4.74%

Coffee prices have experienced a decline of 4.74% this week, an unfavourable movement for trend-following strategies that have been capitalizing on the recent strong bullish trend.

Causal Factors:

1. Market Correction:
   • After reaching record highs, coffee prices are undergoing a correction as traders reassess supply and demand dynamics.
2. Improved Weather Conditions:
   • Favorable weather forecasts in key coffee-producing regions, such as Brazil, have alleviated some concerns about future supply shortages, contributing to the price decline.
3. Demand Elasticity:
   • Elevated coffee prices have led to concerns about demand elasticity, with consumers potentially reducing consumption or seeking alternatives, thereby exerting downward pressure on prices.

Trend-Following Perspective:

• Short-Term Models: The recent price drop may trigger exit signals for short-term trend followers who had been riding the bullish trend, prompting a reassessment of positions to mitigate potential losses.
• Medium- to Long-Term Models: Those with longer investment horizons should monitor the market closely, as the current decline could indicate a potential trend reversal. Confirmation of sustained downward momentum is advisable before adjusting strategies.

The recent decline in coffee prices is influenced by market corrections, improved weather conditions in major producing regions, and demand elasticity concerns. Trend-following strategies should exercise caution and closely monitor these developments to inform their trading decisions.

Russell 2000: -3.72%

The Russell 2000 index, representing small-cap stocks, experienced a decline of 3.72% this week, posing challenges for trend-following strategies that have been bullish on this market.

Causal Factors:

1. Economic Policy Uncertainty:
   • Concerns Over Tariffs: Reports indicate that apprehensions regarding President Donald Trump's policies, particularly tariffs, are impacting business activities. Companies have expressed widespread concerns about federal government policies, including spending cuts and tariffs, leading to uncertainty in sales and rising prices due to tariff-related cost increases.
2. Weakening Economic Indicators:
   • Decline in Business Activity: Data suggests that U.S. business activity is approaching stagnation, with optimism declining amid worries about tariffs and other potential policy changes.
   • Consumer Sentiment and Home Sales: Additional reports reveal weaker-than-expected consumer sentiment and a downturn in home sales, contributing to the negative performance of small-cap stocks.
3. Interest Rate Concerns:
   • Impact of High Borrowing Costs: Elevated interest rates have raised borrowing costs, which disproportionately affect small-cap companies with higher debt levels, leading to increased refinancing risks and financial strain.

Trend-Following Perspective:

• Short-Term Models: The recent downturn may trigger exit signals for short-term trend followers who had maintained bullish positions, prompting a reassessment to mitigate potential losses.
• Medium- to Long-Term Models: Those with longer investment horizons should closely monitor these developments. The current decline could signify a potential trend reversal; thus, confirmation of sustained downward momentum is advisable before adjusting strategies.

The Russell 2000's recent decline is influenced by economic policy uncertainties, weakening economic indicators, and concerns over interest rates. Trend-following strategies should exercise caution and closely monitor these factors to inform their trading decisions.trend-following rules, particularly during transitional market phases.

Conclusion: A Pivotal Week for Trend Followers

This week saw the sharp reversal of some of the strongest trends in the market, particularly in commodities like coffee, orange juice, and cocoa, which had previously been the standout performers in the trend-following space. These abrupt shifts serve as a reminder that no trend lasts forever and that systematic traders must remain vigilant in adapting to evolving market conditions.

Volatility surged across asset classes, with equities reversing prior gains, while energy markets rebounded. Meanwhile, soft commodities continued their struggles, highlighting the uneven and fragmented nature of the current trading environment.

For trend-followers, the challenge remains balancing conviction in existing positions with the flexibility to adjust when the evidence demands it. This week underscored the importance of disciplined risk management and a robust systematic process to navigate market turbulence. While whipsaws and false breakouts can frustrate short-term execution, they are an inherent part of trend-following.

As we move forward, traders should keep a close watch on whether this week's reversals signal the start of a broader shift in market dynamics or simply represent short-term volatility within longer-term trends. Staying patient, systematic, and prepared for emerging opportunities will be key in the weeks ahead.

List of Resources used in the Week in Review

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