Trend Following - Week in Review - January 03, 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.

"A Strong Start to 2025: Energies Lead the Charge"

The first week of 2025 has ushered in renewed optimism for trend followers, with the TTU Trend Barometer climbing to a robust 61%, signalling a very strong trend environment. This marks a significant improvement from last week's reading of 52%, indicating an accelerated rate of change in market trends.

The SG Trend Index has already posted a gain of +1.06% month-to-date (MTD), providing early signs of positive momentum for trend-following strategies in the new year.

This positive shift is further supported by recent market analyses. The S&P 500, for instance, has entered 2025 following its best two-year performance since the late 1990s, with a 25% increase in 2024 and a 24% surge in 2023, primarily driven by the boom in artificial intelligence and interest rate cuts.

Additionally, U.S. stock index futures climbed ahead of Wall Street's initial 2025 trading session, with investors optimistic about a new political landscape and further interest rate reductions expected to boost economic and corporate performance.

These developments provide a hopeful start for trend-following strategies as we move further into 2025, reflecting a promising environment for capturing emerging market opportunities.

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 the first week of 2025 unfolds, asset class performance has been varied, with notable momentum in energies and soft commodities driving significant trends. Here’s how the key sectors performed:

• Volatility Index (VIX Futures) (-0.84%): The VIX futures continued to decline, indicating reduced immediate market anxiety. This reflects cautious optimism in financial markets despite ongoing macroeconomic uncertainties.
• Grains (-0.28%): Grains markets dipped slightly this week, suggesting a softening in demand and stable global supply conditions. Seasonal factors continue to play a role in maintaining subdued activity in this sector.
• Meats (-0.29%): Meats also saw a minor decline, with consistent demand offset by slight adjustments in supply chain dynamics. The agricultural sector remains stable despite the dip.
• Bonds (+0.14%): Bonds recorded a modest uptick, reflecting a mixed response to ongoing market expectations of Federal Reserve policy. Yields remain pressured but showed minor recovery this week.
• Energy (+2.72%): Energy was the standout performer this week, driven by strong gains in crude oil and related products. Ongoing geopolitical tensions, coupled with winter demand, have bolstered market sentiment, signaling a robust start for the sector in 2025.
• Metals (+0.52%): Metals saw moderate gains, with a slight recovery in industrial and precious metals. Demand continues to show resilience despite mixed global macroeconomic signals.
• Soft Commodities (+1.42%): Soft commodities posted healthy gains, led by strong movements in cocoa and coffee. Seasonal demand and ongoing supply concerns have contributed to the positive momentum.
• Equity Indexes (-0.54%): Equity markets experienced slight declines this week, reflecting cautious repositioning by investors amid ongoing concerns over interest rates and global economic growth.
• Currencies (-0.35%): The U.S. dollar softened slightly, maintaining strength against major peers but reflecting some profit-taking and cautious sentiment toward monetary policy developments.

Overall, the first week of 2025 has demonstrated a diverse array of movements across asset classes, with energies and soft commodities driving early momentum and setting a promising tone for trend-following strategies. While equities and grains encountered minor setbacks, the broader market environment signals opportunity, supported by reduced volatility and strong sector-specific trends. The resilience in metals, bonds, and soft commodities highlights the importance of diversification and strategic adaptability as traders navigate the evolving macroeconomic landscape. Trend followers are poised to leverage these early indications of market potential.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

Cocoa: +14.25%

Cocoa prices have surged by 14.25% this week, continuing a significant upward trend that has been a hallmark of trend-following success over the past two years. This substantial movement highlights the volatile ride that has characterized cocoa markets, making it particularly suited to medium- to long-term trend-following strategies that embrace significant price swings.

Causal Factors Driving the Move:

• Supply Shortages: West Africa, particularly Côte d'Ivoire and Ghana, which produce about 75% of the world’s cocoa, has faced persistent challenges. Adverse weather conditions, including dry spells and Harmattan winds, have significantly reduced crop yields. Supply chain disruptions have compounded these issues, creating a global supply-demand imbalance.
• Strong Global Demand: Robust demand for chocolate and cocoa-based products continues to strain limited supplies, contributing to sustained upward price momentum. Seasonal holiday demand, especially in developed markets, has further amplified the pressure on inventories.
• Market Speculation and Sentiment: Speculative buying activity has surged as traders anticipate prolonged supply constraints. This speculative momentum has heightened market volatility, with price spikes becoming a recurring feature of the cocoa market.

Trend-Following Perspective:

The volatile nature of cocoa’s price movements has created an ideal environment for medium- to long-term trend-following strategies. By allowing for significant volatility, these strategies have captured the consistent upward trajectory in cocoa prices, turning it into a profitable outlier.

This week’s 14.25% surge further validates the strength of the trend, rewarding those who remained committed through the price fluctuations. The ability to withstand and adapt to the volatility has been a critical factor for trend-followers riding this market over the past two years. For these investors, the sharp upward moves not only reinforce the existing trend but also highlight the potential for continued gains as supply issues and robust demand persist.

Cocoa's performance serves as a testament to the power of systematic, rules-based approaches that thrive in volatile yet directional markets.

Crude Oil WTI: +4.92%

Crude Oil WTI prices have risen by 4.92% this week, yet the market remains in a congestion pattern without a clear breakout direction.

Causal Factors:

• Geopolitical Tensions: Anticipation of stricter sanctions under President Donald Trump's administration against countries like Iran, Venezuela, and Russia has raised concerns about reduced global oil supplies, contributing to price increases.
• Economic Policy Expectations: Investors are optimistic about potential policy support for economic growth, particularly from China, which could boost oil demand. This sentiment has influenced recent price movements.
• Seasonal Demand: Colder weather forecasts in the U.S. and Europe are expected to increase heating oil demand, providing additional support to crude prices.

Trend-Following Perspective:

Despite the recent price uptick, the absence of a decisive breakout keeps trend-following traders on the sidelines. The current congestion pattern lacks the sustained directional movement necessary for trend-following strategies to engage confidently. Traders are likely awaiting clearer signals indicating a definitive trend before committing to positions in the crude oil market.

Heating Oil: +4.66%

Heating oil prices have increased by 4.66% this week, a movement that may be unfavourable for trend-following (TF) strategies, given the longer-term bearish trend in this market.

Causal Factors:

• Severe Cold Weather: The U.S. is bracing for a significant polar vortex, expected to bring the coldest January in over a decade. This anticipated deep freeze has led to a surge in demand for heating fuels, including heating oil, as households prepare for the extreme temperatures.
• Increased Demand: The forecasted drop in temperatures has prompted a rise in heating oil consumption, contributing to the recent price increase. This surge in demand is typical during severe winter conditions, as more households rely on heating oil to maintain indoor warmth.

Trend-Following Perspective:

For trend-following traders, the recent 4.66% uptick in heating oil prices may pose challenges. Given the prevailing longer-term bearish trend, this short-term price increase could be seen as a counter-trend movement, potentially leading to unfavourable positions for those adhering to the established downward trajectory. Trend followers may need to exercise caution, closely monitoring market developments to determine whether this price rise signifies a temporary fluctuation due to weather-induced demand or the beginning of a trend reversal.

Gasoline RBOB: +4.37%

Gasoline RBOB prices have risen by 4.37% this week, mirroring the movement observed in heating oil.

Causal Factors:

• Seasonal Demand Increase: The onset of colder weather typically leads to a rise in demand for heating fuels, including heating oil and gasoline, as consumers increase usage to maintain warmth.
• Supply Constraints: Any disruptions in the supply chain, whether due to geopolitical tensions or production issues, can lead to reduced availability of gasoline, thereby driving up prices.
• Market Speculation: Traders' expectations of future supply and demand dynamics can influence current prices, with anticipations of tighter supply or increased demand leading to price hikes.

Trend-Following Perspective:

For trend-following traders, the recent 4.37% increase in Gasoline RBOB prices presents a scenario similar to that of heating oil. Given the longer-term bearish trend in the gasoline market, this short-term price rise may be seen as a counter-trend movement. Trend followers might interpret this uptick as a temporary fluctuation rather than an indication of a sustained trend reversal. Consequently, they may choose to maintain their current positions, awaiting more definitive signals before adjusting their strategies.

Crude Oil Brent: +3.93%

Brent crude oil prices rose by 3.93% this week, closely mirroring the movement in West Texas Intermediate (WTI) crude. This similarity is not surprising given the highly correlated nature of these two benchmarks, which often respond similarly to global supply and demand dynamics.

Causal Factors:

• Geopolitical Tensions: Anticipation of stricter sanctions under President Donald Trump's administration against countries like Iran, Venezuela, and Russia has heightened concerns over reduced global oil supplies, contributing to the price increase.
• Economic Policy Expectations: Investors remain optimistic about potential policy support for global economic growth, particularly from China, which could significantly boost oil demand. This sentiment has played a key role in recent price movements.
• Seasonal Demand: With colder weather forecasts in the U.S. and Europe, demand for heating oil and related fuels has surged, indirectly supporting crude prices.

Trend-Following Perspective:

For trend-following traders, the 3.93% price increase in Brent crude remains challenging to act upon, much like its WTI counterpart. The market is currently in a congestion pattern, with no clear breakout direction to the upside or downside. While the movement reinforces the high correlation between Brent and WTI, trend followers are likely to remain on the sidelines, waiting for more definitive signals to indicate the start of a sustained trend.

What’s Moving Down

Lean Hogs: -3.98%

Lean hog prices declined by 3.98% this week, reflecting the market's inherent volatility and lack of a clear directional trend.

Causal Factors:

• Seasonal Trends: Historically, lean hog prices tend to experience fluctuations based on seasonal demand and supply factors. The futures market often anticipates lower hog prices towards the end of the year, followed by an increase until mid-year.
• Market Liquidation: Recent reports indicate continued long liquidation in lean hog futures, contributing to the downward pressure on prices.

Trend-Following Perspective:

Given the high volatility and absence of a clear trend direction in the lean hog market, trend-following traders are likely adopting a cautious approach. The unpredictable price movements make it challenging to identify and capitalize on sustained trends, leading many to remain on the sidelines until a more definitive market direction emerges.

Wheat: -3.29%

Wheat prices declined by 3.29% this week, continuing a steady bearish trend observed in recent months.

Causal Factors:

• Global Supply Abundance: Increased wheat production in major exporting countries has led to ample global supplies, exerting downward pressure on prices. For instance, the European Union's 2024 wheat production is projected at 4.52 billion bushels, contributing to the oversupply.
• Strong Export Competition: Countries like Russia have been exporting wheat at competitive prices, influencing global market dynamics and contributing to the price decline.
• Stable Demand: While global demand for wheat remains robust, it has not increased sufficiently to absorb the higher supply levels, leading to a supply-demand imbalance that favours lower prices.

Trend-Following Perspective: For trend-following traders, the ongoing decline in wheat prices aligns with the established bearish trend. The orderly nature of this decline provides a clearer market direction, allowing traders to maintain or initiate short positions with greater confidence. The sustained downward movement suggests that, barring any significant market disruptions, the bearish trend may continue in the near term.

Lumber: -3.22%

Lumber prices declined by 3.22% this week, reflecting the market's inherent volatility.

Causal Factors:

• Seasonal Demand Fluctuations: Lumber prices are subject to seasonal trends, with demand typically increasing during the spring construction season and tapering off during the winter months. As we approach spring 2025, increased construction and housing market demand are expected to influence lumber prices.
• Market Stabilization: After significant fluctuations in previous years, the lumber market has shown signs of stabilization, with prices returning to more predictable seasonal changes. This stabilization allows both lumber producers and end-users to approach the market with more confidence and plan into the mid-term future.

Trend-Following Perspective:

Given the volatile nature of the lumber market, trend-following traders with medium to long-term strategies may maintain long positions, provided they employ wide stop-loss measures to accommodate significant price swings. The recent price decline may be viewed as a temporary retracement within a broader trend, and traders are likely to monitor the market closely for signs of sustained movement before making strategic adjustments.

Cotton: -1.64%

Cotton prices declined by 1.64% this week, continuing a steady bearish trend.

Causal Factors:

• Global Supply and Demand Imbalance: Increased production in major cotton-producing countries, such as Brazil, has led to an oversupply in the global market. This surplus, coupled with sluggish demand, has exerted downward pressure on prices.
• Weak Export Demand: Despite recent improvements, U.S. cotton export sales remain below USDA estimates, indicating persistent demand challenges. This lack of robust demand contributes to the bearish price trend.
• High Input Costs and Low Profit Margins: Farmers are facing high input costs, and with current cotton prices, many are struggling to break even. This economic strain may lead to reduced planting in the future, potentially impacting supply dynamics.

Trend-Following Perspective:

For trend-following traders, the orderly decline in cotton prices aligns with the established bearish trend. The consistent downward movement provides a clear market direction, allowing traders to maintain or initiate short positions with greater confidence. However, they should remain vigilant for any market changes that could signal a trend reversal.

Nikkei 225: -1.49%

The Nikkei 225 index declined by 1.49% this week, posing challenges for trend-following traders who likely hold long positions in this market.

Causal Factors:

• Global Economic Concerns: Recent global economic uncertainties have led to increased market volatility, impacting investor sentiment and contributing to declines in major stock indices, including the Nikkei 225.
• Market Corrections: Following significant gains in 2024, the Nikkei 225 has experienced periodic corrections as investors reassess valuations and potential risks, leading to short-term declines.

Trend-Following Perspective:

For trend-following traders, the recent 1.49% decline in the Nikkei 225 is unfavourable, especially for those maintaining long positions. While the broader upward trend may still be intact, such short-term downturns can trigger stop-loss orders or prompt strategic reassessments. Traders may need to evaluate their risk management approaches and monitor the market closely for signs of trend continuation or further corrections.

Conclusion

As the first week of 2025 unfolds, it becomes evident that the markets are already showcasing the dynamism and complexity that define trend-following strategies. Energies have led the charge, underscoring their potential as significant drivers for early-year gains, while the steady rise in soft commodities like cocoa highlights the rewards of capturing long-term trends. However, the mixed performance across other sectors—ranging from the bearish continuations in wheat and cotton to the volatile yet directionless moves in crude oil and the Nikkei 225—emphasizes the importance of diversification and disciplined adherence to systematic trading processes.

This week’s developments reflect the essential duality of trend-following: the opportunities offered by clear, sustained trends and the challenges posed by volatility and congestion patterns. The resilience and adaptability of trend-following strategies remain crucial as traders navigate an ever-changing landscape of geopolitical tensions, seasonal demand shifts, and global economic uncertainties.

Looking ahead, the signals from the TTU Trend Barometer and the SG Trend Index suggest a promising environment for capturing emerging opportunities in 2025. For trend followers, this week serves as both a reminder of the power of systematic approaches and an encouragement to stay committed to their processes as the market reveals its potential. As always, the journey is as much about patience and discipline as it is about embracing the unexpected turns that make the financial markets so compelling.

List of Resources used in the Week in Review

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