Trend Following - Week in Review - February 28, 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.

"Bearish Momentum Intensifies as Trend Followers Face Headwinds"

This week brought another round of challenges for trend-followers, with SG Trend down -2.60% for the month and -2.46% YTD, reflecting the ongoing struggle to capture sustained trends. The market remained fragmented, with sharp reversals, increased volatility, and downside pressure across key sectors.

While bonds and volatility surged, commodities, equities, and metals faced broad declines, adding to the complexity of trend execution. As uncertainty mounts, risk management and discipline remain crucial in navigating these turbulent conditions.

TTU Trend Barometer: 32% (Last week: 25%)

• Despite a slight rise in the Trend Barometer, markets remain in a difficult trading environment. A reading of 32% is still well below the threshold for a favourable trend-following backdrop, reinforcing the prevalence of choppy conditions and false breakouts.
• 10-day rate of change: Marginal increase

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 final week of February 2025, financial markets continued to exhibit volatility, with equities struggling to stabilize, energy reversing lower, and metals experiencing a steep decline. Meanwhile, bonds gained traction as investors sought safety, while the Volatility Index (VIX) remained elevated, reflecting ongoing market uncertainty.

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

• Equities: -0.87% (Previous week: -2.15%)
  • Equities continued to decline, though at a slower pace than last week.
  • Sentiment remained fragile due to weak economic data and policy uncertainty.
  • Defensive positioning continued as investors shifted to bonds and volatility hedges.
• Energy: -2.55% (Previous week: +2.04%)
  • Energy markets reversed sharply lower, erasing last week’s gains.
  • Weaker demand forecasts and profit-taking weighed on prices.
  • Geopolitical concerns failed to provide sustained support.
• Metals: -4.17% (Previous week: -1.42%)
  • Metals posted a steep decline, with industrial metals suffering the most.
  • A stronger U.S. dollar pressured the sector, while global growth concerns further dampened demand.
  • Profit-taking in gold and silver added to the weakness.
• Grains: -3.91% (Previous week: +0.50%)
  • Grains flipped into negative territory, erasing last week’s gains.
  • Improved weather conditions and better-than-expected supply outlooks contributed to selling pressure.
• Meats: -0.93% (Previous week: -1.71%)
  • The meats sector continued its downward trajectory, albeit at a slower pace.
  • Weak consumer demand persisted, while rising feed costs pressured producer margins.
• Soft Commodities: -2.32% (Previous week: -3.18%)
  • Soft commodities remained under pressure, though the pace of decline moderated slightly.
  • Cocoa and coffee extended their sell-offs, driven by supply concerns and market corrections.
• Currencies: -1.07% (Previous week: +0.16%)
  • The U.S. dollar declined after last week’s small gain, reflecting increased market volatility.
  • Central bank policy shifts and economic uncertainty weighed on currency markets.
• Volatility Index (VIX Futures): +3.27% (Previous week: +4.14%)
  • The VIX continued to climb, though at a slower pace than last week.
  • Equity weakness and geopolitical concerns drove hedging demand.
• Bonds: +1.18% (Previous week: +0.24%)
  • Bonds saw renewed demand as investors rotated into safe-haven assets.
  • Falling yields signaled increasing caution in financial markets.

This week’s market movements highlight the challenging conditions for trend-followers, with continued weakness in equities, energy, and soft commodities, while bonds and volatility hedges gained traction.

• Equities remained under pressure, albeit with a shallower decline than the previous week.
• Energy and metals saw sharp declines, adding to trend-following difficulties.
• Soft commodities struggled, while bonds rallied on safe-haven demand.
• Volatility surged, reinforcing investor uncertainty.

With trend conditions remaining fragile, risk management and systematic discipline remain essential. The coming weeks will determine whether these moves develop into sustained trends or continue the choppy 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

Lumber: +4.03%

Lumber prices rose 4.03% this week, extending recent gains and reaching new multi-month highs. The market continues to be influenced by supply-side constraints, policy uncertainties, and rising demand from reconstruction efforts.

Causal Factors:

1. Supply Constraints:
   • Canadian sawmill curtailments due to higher U.S. tariffs and weaker demand earlier in the year have tightened supply.
   • Major producers such as Canfor Corp. and Western Forest Products Inc. have announced reductions in output, exacerbating supply concerns.
2. Policy and Tariffs:
   • The U.S. Department of Commerce has delayed its review of tariffs on Canadian softwood lumber, which are expected to increase significantly. This uncertainty has put upward pressure on prices.
3. Demand Growth from Reconstruction Efforts:
   • Southern California’s rebuilding efforts following recent wildfires have increased demand for lumber, with estimates pointing to a significant rise in lumber consumption for reconstruction.

Trend-Following Perspective:

• Short-Term Models: The price surge presents a favourable setup for short-term trend-following strategies, as momentum remains strong and the breakout is supported by volume.
• Medium-Term Models: The higher highs and higher lows pattern confirms an established uptrend, making it favourable for medium-term trend-followers who entered during the breakout.
• Long-Term Models: The broader trend has been volatile, but the current breakout above resistance could signal a shift toward a sustained uptrend. Long-term trend-followers will likely remain positioned but should monitor for sustained momentum.

The combination of supply constraints, tariff-related uncertainties, and increased demand from rebuilding efforts has contributed to the rise in lumber prices. Trend followers should monitor these developments closely to assess the sustainability of this uptrend.

VIX Futures: +3.27%

The CBOE Volatility Index (VIX) futures experienced a 3.27% increase this week, indicating a modest rise in market volatility. Despite this uptick, the VIX remains at relatively low levels compared to historical norms.​

Causal Factors:

1. Economic Policy Uncertainty:
   • Tariff Concerns: Recent discussions about potential new tariffs, particularly in sectors like automobiles and technology, have introduced uncertainty, leading to increased hedging activities.
2. Market Performance:
   • Equity Market Declines: The S&P 500 recently dropped below the 6,000 mark due to fears of a slowing U.S. economy, contributing to a rise in the VIX as investors seek protection against potential downturns. ​
3. Investor Sentiment:
   • Increased Demand for Protective Options: Investors are starting to increase tail-risk hedging, with potential shocks that could stem from tariffs to geopolitical events, leading to a slight uptick in volatility expectations. ​

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 modest rise in VIX futures reflects growing concerns over economic policies and market performance. Trend-followers should monitor these developments, as shifts in volatility can impact the broader trading environment.

Ethanol: +2.44%

Ethanol prices have increased by 2.44% this week; however, the market remains in a bearish trend, presenting challenges for trend-following strategies.​

Causal Factors:

1. Policy Developments:
   • EPA's Regional E15 Expansion: The U.S. Environmental Protection Agency (EPA) has approved year-round sales of E15 (15% ethanol blend) in select Midwestern states, effective April 28, 2025. This regional approach has led to calls for a uniform national policy to prevent market fragmentation. 
   • Import Tax Considerations: Brazil is contemplating a reduction in ethanol import taxes to strengthen trade relations with the U.S. and address domestic inflation concerns. ​
2. Supply and Demand Dynamics:
   • Production Forecasts: The U.S. Energy Information Administration (EIA) has increased its ethanol production forecasts for 2025 and 2026, anticipating higher output levels. ​
   • Export Challenges: India's decision to extend its sugar export ban to boost local ethanol production is expected to impact global sugar supplies, potentially influencing ethanol markets. ​

Trend-Following Perspective:

• Short-Term Models: The recent price uptick may not provide sufficient momentum for short-term trend-following strategies, as the overall bearish trend persists.​
• Medium- to Long-Term Models: Given the prevailing downward trend, medium- and long-term trend-followers may find current market conditions unfavorable and might consider maintaining a cautious stance until a clear trend reversal is evident.​

Despite the week's price increase, the ethanol market continues to face bearish pressures influenced by policy decisions, production forecasts, and international trade dynamics. Trend-followers should remain vigilant and assess these factors carefully when formulating their strategies.

30-Year Treasury Bonds: +2.18%

This week, 30-year Treasury bond prices rose by 2.18%, indicating a decline in yields. Despite this price increase, the market continues to exhibit a bearish trend, posing challenges for trend-following strategies.​

Causal Factors:

1. Federal Reserve Policy Adjustments:
   • Consideration of QT Pause: Federal Reserve officials are contemplating a pause or slowdown in the quantitative tightening process, aiming to alleviate bond market concerns amid fiscal uncertainties. ​
2. Investor Sentiment:
   • Economic Uncertainty: Deteriorating consumer sentiment, influenced by factors such as government layoffs, tariffs, and inflation, has increased market volatility, leading investors to seek the relative safety of long-term Treasury bonds. ​
3. Global Economic Factors:
   • Foreign Investment Shifts: Major international investors, like Japan's Nippon Life Insurance, have increased purchases of foreign bonds, including U.S. Treasuries, in response to global economic policies and currency dynamics. ​

Trend-Following Perspective:

• Short-Term Models: The recent price uptick may not provide sufficient momentum for short-term trend-following strategies, as the overall bearish trend persists.​
• Medium- to Long-Term Models: Given the prevailing downward trend, medium- and long-term trend-followers may find current market conditions unfavourable and might consider maintaining a cautious stance until a clear trend reversal is evident.​

Despite the week's price increase, the 30-year Treasury bond market continues to face bearish pressures influenced by policy decisions, investor sentiment, and global economic factors. Trend-followers should remain vigilant and assess these elements carefully when formulating their strategies.

Feeder Cattle: +1.99%

Feeder cattle prices have increased by 1.99% this week, aligning with the ongoing bullish trend in the cattle market. This upward movement is favourable for trend-following strategies.​

Causal Factors:

1. Supply Constraints:
   • Declining Cattle Inventory: As of January 1, 2025, the U.S. cattle herd has decreased by 1% from the previous year, reaching the lowest level since 1951, primarily due to prolonged drought conditions and elevated feed costs. ​
2. Trade Uncertainties:
   • Potential Tariffs: Concerns over possible tariffs on beef imports from Canada and Mexico have led Canadian ranchers to reduce their cattle herds, potentially tightening North American beef supplies and supporting higher feeder cattle prices. ​
3. Strong Demand:
   • Robust Consumer Demand: Despite supply challenges, consumer demand for beef remains strong, contributing to elevated prices in the feeder cattle market. ​

Trend-Following Perspective:

• Short-Term Models: The recent price increase reinforces existing positions, suggesting potential for continued gains in the near term.​
• Medium- to Long-Term Models: The sustained bullish trend, driven by tight supplies and strong demand, indicates favourable conditions for maintaining long positions. However, traders should remain attentive to policy developments and market volatility that could impact future price movements.​

In summary, the feeder cattle market's upward trajectory is supported by supply constraints, trade uncertainties, and robust demand, creating a conducive environment for trend-following strategies.

What’s Moving Down

Palladium: -8.07%

Palladium prices have experienced a significant decline of 8.07% this week, reinforcing the existing bearish trend. This downward movement is favourable for trend-following strategies positioned on the short side.​

Causal Factors:

1. Proposed Auto Tariffs:
   • Impact on Demand: President Donald Trump's announcement of impending tariffs on automobile imports, effective April 2, 2025, has raised concerns about reduced vehicle sales. Given that the automotive industry accounts for approximately 80% of global palladium consumption, a potential decrease in vehicle demand directly translates to diminished palladium requirements. ​
2. Market Reactions:
   • Price Decline: Following the tariff announcement, spot palladium prices have fallen more than 7%, reflecting market apprehension regarding future demand. ​
3. Supply Considerations:
   • Stable Production Levels: Despite demand concerns, palladium production remains steady, leading to an oversupply situation that exerts additional downward pressure on prices.​

Trend-Following Perspective:

• Short-Term Models: The pronounced price drop this week may present profitable opportunities for short-term trend-followers holding bearish positions.​
• Medium- to Long-Term Models: The continuation of the bearish trend suggests that medium- and long-term trend-followers might consider maintaining or increasing their short exposures, while staying vigilant to any market shifts that could signal a trend reversal.​

The substantial decline in palladium prices is primarily driven by anticipated reductions in automotive demand due to proposed import tariffs, coupled with stable supply levels. These factors collectively reinforce the bearish trend, offering favourable conditions for trend-following strategies focused on capitalizing on downward price movements.

Wheat: -8.03%

Wheat prices have experienced a significant decline of 8.03% this week, reinforcing the prevailing bearish trend. This downward movement is beneficial for trend-following strategies positioned on the short side.​

Causal Factors:

1. Global Import Demand Reduction:
   • China's Decreased Imports: The U.S. Department of Agriculture (USDA) has significantly lowered its projections for China's wheat imports to 8 million metric tons, a 59% decrease from the previous year. This reduction is attributed to China's record domestic harvests, leading to higher self-sufficiency and reduced reliance on imports. ​
2. Improved Weather Conditions in Key Growing Regions:
   • Favourable U.S. Climate: In the United States, a widespread warming trend has settled over major wheat-producing areas, with temperatures forecasted to remain 9-18°F above normal. These conditions are conducive to winter wheat development, potentially leading to increased yields and contributing to the oversupply in the market. ​
3. Economic Challenges in Major Importing Countries:
   • Slowing Economies: Economic slowdowns in major wheat-importing countries, such as China and Indonesia, have dampened demand. China's economic growth is expected to decelerate in 2025, while Indonesia's growth remains stagnant. These economic challenges reduce purchasing power and import needs, exerting downward pressure on global wheat prices. ​

Trend-Following Perspective:

• Short-Term Models: The sharp price decline this week may present profitable opportunities for short-term trend-followers holding bearish positions.​
• Medium- to Long-Term Models: The continuation of the bearish trend suggests that medium- and long-term trend-followers might consider maintaining or increasing their short exposures, while remaining attentive to any market shifts that could signal a trend reversal.​

The substantial decrease in wheat prices is primarily driven by reduced global import demand, favourable weather conditions boosting supply, and economic challenges in key importing nations. These factors collectively reinforce the bearish trend, offering advantageous conditions for trend-following strategies focused on capitalizing on downward price movements.

Natural Gas: -7.51%

Natural gas prices have declined by 7.51% this week, posing challenges for short-term trend-following strategies that may have anticipated continued upward momentum.​

Causal Factors:

1. Mild Weather Conditions:
   • Temperature Moderation: Following a period of severe cold, temperatures have moderated across key regions, leading to decreased demand for heating and contributing to the oversupply in the market. ​
2. Increased Production and Supply:
   • Rising Output: Despite earlier production challenges due to extreme weather, natural gas output has rebounded, leading to increased supply levels. ​
3. Storage Inventory Levels:
   • Above-Average Withdrawals: Higher-than-average withdrawals from underground storage in January have impacted current inventory levels, influencing market dynamics. ​

Trend-Following Perspective:

• Short-Term Models: The recent price decline may have resulted in unfavourable outcomes for short-term trend-following models that were positioned for continued gains, necessitating prompt adjustments to mitigate potential losses.​
• Medium- to Long-Term Models: These models may remain cautious, seeking confirmation of a sustained trend before making significant position changes, especially given the volatility in weather patterns and production levels.​

The notable decrease in natural gas prices this week is primarily driven by milder weather conditions, increased production, and changes in storage inventories. Short-term trend-followers may face challenges due to this abrupt shift, while medium- to long-term models should closely monitor these developments to inform their strategies.

Sugar: -7.13%

Sugar prices have declined by 7.13% this week, a movement that may be favourable for trend-following strategies, especially those holding bearish positions.​

Causal Factors:

1. Improved Global Supply Prospects:
   • Favorable Weather in Brazil: Beneficial weather conditions have enhanced sugarcane yields, leading to increased production forecasts. ​
   • Resumption of Exports from India: India has authorized the export of 1 million metric tons of sugar for the current season, contributing to global supply and exerting downward pressure on prices. ​
2. Currency Fluctuations:
   • Depreciation of the Brazilian Real: A weaker Brazilian Real makes sugar exports more competitive, encouraging higher export volumes and influencing global prices. ​
3. Market Corrections:
   • Adjustment from Previous Highs: Following a period of elevated prices, the market is undergoing a correction as supply concerns ease, leading to the recent decline.​

Trend-Following Perspective:

• Short-Term Models: The recent price decrease aligns with bearish trends, potentially offering profitable opportunities for short-term trend-following strategies.​
• Medium- to Long-Term Models: These models may find the current downtrend favourable but should remain vigilant for any changes in supply dynamics or policy decisions that could impact long-term positions.​

The notable decline in sugar prices this week is primarily driven by improved global supply prospects, currency fluctuations, and market corrections. Trend-following strategies, particularly those with bearish positions, may find this environment advantageous but should continue to monitor market developments closely.

Corn: -7.03%

Corn prices have declined by 7.03% this week, presenting challenges for short-term trend-following strategies that may have anticipated continued upward momentum.​

Causal Factors:

1. Increased Planting Intentions:
   • U.S. Farmers Expanding Corn Acreage: American farmers plan to increase corn planting by 4% to 94.55 million acres in 2025, aiming for better profitability despite challenging price environments. ​
2. Market Corrections:
   • Adjustment from Previous Gains: Following a recent rally, corn prices are undergoing a correction as traders reassess supply and demand dynamics. ​
3. Global Supply Considerations:
   • Potential Record Production: The USDA projects a record corn crop for the 2025-26 season, with production estimated at 15.585 billion bushels, contributing to expectations of increased supply and potential price pressures. ​

Trend-Following Perspective:

• Short-Term Models: The recent price decline may have resulted in unfavourable outcomes for short-term trend-following models positioned for continued gains, necessitating prompt adjustments to mitigate potential losses.​
• Medium- to Long-Term Models: These models may still find the current downtrend favourable, especially if bearish signals persist. However, they should remain vigilant for any changes in planting intentions, policy decisions, or global supply dynamics that could impact long-term positions.​

The notable decrease in corn prices this week is primarily driven by increased planting intentions, market corrections, and projections of record production. Trend-following strategies should closely monitor these developments to inform their trading decisions.

Conclusion: Navigating Choppy Waters In Trend-Following

This week reinforced the challenges facing trend-followers, with persistent market fragmentation, abrupt reversals, and rising volatility shaping the trading landscape. Equities remained under pressure, energy markets suffered sharp declines, and metals saw steep losses, adding to trend-following difficulties. Meanwhile, bonds and volatility indicators saw gains as investors sought safe-haven assets amid economic uncertainty.

Despite a slight improvement in the TTU Trend Barometer, at 32%, trend conditions remain largely unfavourable, emphasizing the prevalence of short-lived moves and false breakouts. Notably, commodities such as palladium, wheat, and sugar extended their downward momentum, offering opportunities for bearish trend-followers, while lumber and feeder cattle continued their bullish advances, benefiting long-side positions.

With SG Trend Index at -2.60% MTD and -2.46% YTD, caution remains the prevailing theme. Systematic traders must stay adaptive, balancing conviction in long-term strategies with the flexibility to adjust in response to shifting market conditions.

Looking ahead, key questions remain—will these moves develop into more sustained trends, or will choppiness continue to dominate? With markets at an inflection point, risk management and adherence to robust processes remain the best tools in a trend follower’s arsenal. For trend-followers, patience and discipline will be key in filtering signals from noise and maintaining conviction in robust processes.

List of Resources used in the Week in Review

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