Trend Following - Week in Review - July 31, 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.

Important Note: This week, we needed to prepare the report a few days early due to other commitments, so we decided to prepare the report for the end of the month as of Wednesday, July 31, 2024. Going forward, we will return to our normal reporting schedule, publishing each week based on the Friday close of the week.

“Is it Olympic Gold for Trend Followers this Week?!”

Trend Barometer

This week, our trusty Trend Barometer has shown a significant improvement, rising from a weak start of 36 to a more promising 48. While this indicates neutral/break-even conditions, the upward trend suggests that better times might be ahead for trend followers. The SG Trend Index, although showing a month-to-date (MTD) decline of -2.46%, has improved from last week’s read of -3.36%, highlighting some positive momentum despite the overall challenges faced this month. Year-to-Date the index ended July +6.01%.

In summary, performance improved that last few trading days of July. We likened this week's performance to an Olympic race to end the month: a strong start, a challenging mid-section, and a sprint finish to Wednesday that fell just short of securing the gold medal.

The Top Traders Unplugged (TTU) Trend Barometer is a proprietary tool that measures the percentage of markets with medium to strong trends. Just as a thermometer reading of 0 degrees Celsius equates to freezing, when the TTU Trend Barometer reads a value that is less than 40%, market trendiness begins to get “colder” or weaken. Likewise, when the TTU Trend Barometer gets above 55%, the environment gets “hotter” (better).

Weekly Asset Class Snapshot

Here’s how different asset classes moved this week and some of the broad reasons behind these movements:

• Volatility Index: -6.87%: The sharp decline in the VIX reflects reduced market uncertainty, allowing for a more stable trading environment.
• Grains: -2.94%: Weak performance due to ample supply and stable demand.
• Meats: -0.80%: Slight decline amidst balanced supply and demand dynamics.
• Bond: +0.82%: Investors shifting towards safer assets amidst volatility.
• Energy: -0.55%: Small decline influenced by fluctuating crude oil prices.
• Metal: +0.72%: Modest increase driven by industrial demand.
• Soft Commodity: +0.80%: Slight uptick due to varied performance across products like coffee, cocoa, and sugar.
• Equity Index: +1.57%: Positive movement reflecting improved investor sentiment and reactions to corporate earnings.
• Currency: +0.31%: Minor increase influenced by global trade dynamics and macroeconomic data.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

• Sugar Increases by 6.20%

Sugar prices surged by 6.20% this week, driven by strong demand and supply concerns. This spike is particularly notable and challenging for trend followers, as it disrupts the overall downtrend that has persisted since its peak in November 2023. Adverse weather conditions in key sugar-producing regions like Brazil and India have resulted in reduced crop yields and disrupted harvests, tightening global supply. Concurrently, increased consumption spurred by the reopening of economies and festive seasons has elevated demand.

For trend followers, this unexpected price increase poses significant difficulties. Many likely held short positions anticipating further declines, and the reversal may have led to losses this week. Increased speculative activity has also heightened market volatility, complicating navigation and strategy adjustments.

• Rough Rice Increases by 2.94%

Rough Rice prices rose by 2.94% this week, driven by adverse weather conditions affecting supply. This move is particularly challenging for trend followers who may have been short, following the steep drop in price from its recent peak in April 2024. Unfavourable weather in major producing regions has disrupted planting and harvesting schedules, leading to supply constraints.

For trend followers, this unexpected upward movement complicates trading strategies. Many likely held short positions expecting continued declines, and this reversal may have resulted in losses.

• 30 Year Bond Increases by 2.78%

The 30-year bond saw a 2.78% increase this week, reflecting a shift towards safer investments amid ongoing market volatility. This move may signal a potential breakout to the upside, following a prolonged downtrend since March 2020. Several factors have contributed to this increase.

Economic Signals: Recent economic data suggests that inflation is slowing, with the Federal Reserve's preferred measure, the core personal consumption expenditures (PCE) price index, moving closer to the Fed’s 2% target. The Fed has also indicated it may have concluded its rate-hiking cycle, with potential rate cuts on the horizon​ (Schwab Brokerage)​​ (Morgan Stanley)​. This has led to increased demand for longer-duration bonds as investors anticipate more favourable conditions for fixed-income securities.

Flight to Safety: In the face of economic uncertainties and fluctuating equity markets, investors are seeking the relative safety of long-term bonds. This shift is driven by concerns over global economic growth and ongoing geopolitical tensions, which have heightened the appeal of secure government bonds​ (Schwab Brokerage)​​ (Morgan Stanley)​.

For trend followers, this upward movement could indicate the beginning of a new trend. Those who have been short on the bond due to its extended decline might need to reassess their positions. The increased demand for safer assets highlights the importance of staying adaptable and vigilant in response to changing market conditions, ensuring timely adjustments to trading strategies.

• Russell 2000 Increases by 2.70%

The Russell 2000 index rose by 2.70% this week, continuing its long-term bullish trend and providing opportunities for long positions. This surge is part of a notable uptrend since its recent low in October 2023. Several factors have contributed to this positive movement.

Interest Rate Expectations: Investors are anticipating potential interest rate cuts by the Federal Reserve, expected to begin in September. Lower borrowing costs are particularly beneficial for small-cap stocks, which often have higher debt levels compared to large-cap companies. This expectation has fueled a rally in the Russell 2000 as investors position themselves to benefit from the expected easing of monetary policy​ (markets.businessinsider.com)​​​.

Economic Optimism: There is growing optimism around economic conditions improving, which has boosted investor confidence in small-cap stocks. Analysts have pointed out that smaller companies could see substantial gains if economic growth continues and borrowing costs decrease​ (markets.businessinsider.com)​​​. Additionally, the upcoming U.S. presidential election is adding to this optimism, with policies expected to favour deregulation and support for small businesses.

For trend followers, this upward movement aligns with the ongoing uptrend since October 2023. Capitalizing on this trend, many would have positioned themselves long, and the recent increase further validates this strategy. The combination of favourable economic conditions, expected rate cuts, and positive investor sentiment creates a conducive environment for continued gains in the Russell 2000.

JPY Increases by 2.69%

The Japanese Yen saw an increase of 2.69% this week, driven by shifts in global trade dynamics and investor sentiment. This week's up move was against the long-term downtrend that has been in place since the high in January 2021. Several factors contributed to this recent strength.

Central Bank Policies: A key driver has been the Bank of Japan (BoJ) signalling potential policy shifts. Recent indications from the BoJ about possibly exiting its ultra-loose monetary policy have boosted the Yen. The BoJ raised its inflation forecast, suggesting that it might move towards tightening monetary policy in the near future, which has supported the Yen's value​ (IG)​​ (Citi Asia)​.

Global Economic Conditions: Additionally, the expectation of future rate cuts by the Federal Reserve has also played a role. As the Fed signals a potential easing of its aggressive rate hikes, the yield differential between U.S. and Japanese bonds narrows, making the Yen more attractive compared to the Dollar. This has been compounded by a general flight to safety amid geopolitical tensions and economic uncertainties, further increasing demand for the Yen​ (Citi Asia)​​ (DailyFX)​.

For trend followers, this upward movement was against the established long-term downtrend. Many trend followers likely held short positions anticipating continued depreciation of the Yen, and this reversal may have led to losses.

What’s Moving Down

• Canola Declines by 7.01%

Canola prices declined by 7.01% this week, reflecting oversupply and weaker demand dynamics. High production levels in key producing regions, coupled with a lacklustre demand, have contributed to this significant price drop. This decline is favourable for trend followers who have likely been short since the peak in May 2022. The continuation of the bearish trend provides opportunities for trend followers to maintain or increase their short positions in anticipation of further decreases in price.

The global canola market has faced persistent challenges with high yields reported in Canada and Europe. These regions have seen bumper crops, leading to increased supply levels. Additionally, weak demand from key importing countries has exacerbated the oversupply situation, resulting in downward pressure on prices​ (DailyFX)​.

• VIX Declines by 6.87%

The VIX saw a significant decline of 6.87%, indicating reduced market volatility and uncertainty. Often referred to as the "fear gauge," the VIX measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The reduced reading suggests a more subdued and favourable outlook for equity investors, signalling decreased anxiety about potential market downturns and a more stable investment environment. This environment typically supports risk-taking and can lead to bullish sentiment in equity markets.

Lower readings in the VIX reflect a more confident market environment where investors feel less need for protective measures against market swings. This confidence is often driven by stable economic indicators and positive corporate earnings reports. The current low volatility suggests that investors expect steady market performance, reducing the perceived risk of sharp declines​ (DailyFX)​.

• Corn Declines by 5.26%

Corn prices dropped by 5.26%, influenced by high production levels and stable demand. This decline is favourable for trend followers as corn has been in an established downtrend since April 2022. The continued high yields and steady consumption have exerted downward pressure on prices, allowing trend followers to capitalize on their short positions.

The U.S., being one of the largest corn producers, has reported record-high production levels, which have kept the market well-supplied. Additionally, stable global demand, especially from major importers like China and Mexico, has not been sufficient to offset the oversupply, leading to a continued downward trend in prices.

• Natural Gas Declines by 5.14%

Natural gas prices fell by 5.14%, driven by continued high production levels and lower seasonal demand. Despite the downward movement, natural gas is still trading within an established congestion phase since February 2023. Trend followers are likely observing this market for signs of a breakout from this congestion pattern but are unlikely to be actively participating in this asset at the present moment due to the lack of a clear trend.

The energy market has been experiencing fluctuations with natural gas inventories remaining high due to robust production in the U.S. and Russia. Seasonal factors, such as milder weather reducing heating demand, have also contributed to the current price decline. Analysts suggest that a significant breakout from this congestion phase would require either a sharp increase in demand or a notable reduction in production levels.

• Soybean Oil Declines by 4.44%

Soybean oil prices fell by 4.44%, driven by high production levels and weaker demand. This decline is favourable for trend followers as it is likely they have been holding short positions since the peak in August 2023. The persistent oversupply and reduced consumption have maintained the downward pressure on prices, aligning well with the strategies of those positioned to benefit from the ongoing bearish trend.

Global soybean production has been strong, with major producers like the U.S., Brazil, and Argentina reporting high yields. At the same time, demand from the biodiesel industry and food processing sectors has not kept pace, leading to an oversupply. The bearish trend in soybean oil prices is expected to continue unless there is a significant shift in either production or demand dynamics.

Conclusion

This week in trend has seen the TTU Trend Barometer improve to 48, by July 31 and the SG Trend Index slightly recover to -2.46% MTD, but uncertainty remains and geo-political events as well as key economic data being released at the moment, is incredibly volatile, which will continue to be reflected in the performance of Trend Followers until we see a less noisy environment.

Key Highlights:

• Volatility Index: The VIX's sharp decline of 6.87% indicates reduced market uncertainty and a more stable investment landscape, fostering bullish sentiment in equity markets.
• Commodities Mixed Performance: Sugar and rough rice saw notable increases, challenging trend followers with short positions, while canola's significant decline presented opportunities for maintaining bearish stances.
• Equity Indexes: The Russell 2000's rise of 2.70% continues its bullish trend, driven by optimism around economic conditions and anticipated interest rate cuts.
• Bonds: The 30-year bond's increase reflects a flight to safety amid economic uncertainties, suggesting a potential new upward trend.
• Currencies: The Japanese Yen's 2.69% increase highlights shifts in global trade dynamics and investor sentiment, posing challenges for those holding short positions.

In the spirit of the Olympic Games, this week’s market movements can be likened to a series of competitive events where trend followers showcased their endurance, adaptability, and strategic prowess. The market opened with a strong start, reminiscent of a sprinter’s explosive beginning, only to face mid-week hurdles that tested resilience and strategy. By Wednesday's close, the markets demonstrated a robust finish, embodying the determined push of athletes nearing the finish line.

The week’s varied movements emphasize the importance of staying vigilant and adaptable. Trend followers must navigate these shifts with the precision and focus of an Olympian, ready to adjust strategies in response to emerging trends and market signals. As we move forward, economic data, central bank policies, and geopolitical events will continue to shape market dynamics, presenting both challenges and opportunities for traders.

Join us next week for another edition of "This Week in Trend," where we will continue to explore the dynamic world of futures trading and provide insights to help you navigate these markets with confidence. Just like in the Olympics, a strategic mindset and adaptability will be your best allies in achieving success. Thank you for joining us, and we look forward to another exciting week in the futures markets!exciting week in the futures markets!

List of Resources used in the Week in Review

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