Trend Following - Week in Review - June 7, 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 Week Shaped by Diverse Trend Drivers

Trend Barometer

This week, the Trend Barometer dipped from 50 to 41, signalling neutral to break-even trending market conditions. This reflects a moderate decline in market trendiness, indicating a more challenging environment for trend followers.

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

This week, we observed significant movements across various asset classes, driven by a mix of supply dynamics, economic data, and market expectations. We observed meaningful movements across various asset classes, with metals experiencing the largest decline of -3.00%. Energy, however, bucked the trend with a positive movement of 1.18%.

Here's a detailed look at the key changes:

Energy: The energy sector saw a notable positive shift, with natural gas prices surging by 13.53%. This rise was driven by expectations of higher demand due to warmer-than-normal temperatures across the United States, particularly in Texas, where temperatures reached into the 90s and 100s. Additionally, easing production concerns and supportive production trends over the weekend further contributed to the price increase​​.

Metals: Metals experienced the largest decline among asset classes, with platinum prices dropping by -6.87%. This decline was influenced by a stronger US dollar, which makes metals more expensive for holders of other currencies, thereby reducing demand. Additionally, reduced industrial demand, particularly from the automotive sector shifting towards electric vehicles, also played a significant role​.

Soft Commodities: Soft commodities such as soybean oil and canola saw declines of -4.39% and -4.77% respectively. Improved weather conditions in key growing regions have led to better-than-expected crop yields, increasing supply and putting downward pressure on prices.

Bonds: Bond prices rose slightly by 0.48%. This reflects modest adjustments in response to changing interest rate expectations and economic data. Anticipation of continued monetary tightening by central banks has kept bond yields elevated, but some investors sought the relative safety of fixed-income assets amid equity market volatility​.

Indices: Equity indices experienced a slight decrease of -0.34%, influenced by mixed economic data and earnings reports. Ongoing macroeconomic concerns such as inflation and interest rate hikes have kept investor sentiment cautious, despite some positive earnings surprises​.

Currencies: Currency markets showed a minor decline of -0.24%, with the US dollar strengthening against other major currencies. This strength is largely due to expectations of continued interest rate hikes by the Federal Reserve, which has weighed on the value of other currencies​​.

This week's report underscores the diverse drivers impacting markets, from weather conditions influencing energy prices to macroeconomic policies shaping currency and bond movements.

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 prices surged by an impressive 13.53% this week. This spike was largely driven by a combination of supply concerns and expectations of higher demand as the summer season approaches. Factors such as geopolitical tensions affecting gas supply routes, unexpected maintenance at key production facilities, and forecasts of higher electricity consumption due to hotter weather contributed to the rise. For medium to long-term trend followers, this bullish move is testing the support of a congestion pattern observed in natural gas since March 2023. Is this a signal for a bullish breakout? We will keep you posted in our weekly reports.

Cocoa prices surged by 8.84%, continuing their upward trajectory after a notable retracement. This increase is driven by ongoing supply disruptions in major producing regions like West Africa. Factors such as political instability, unfavourable weather conditions, and logistical challenges have all contributed to the constrained supply, thereby pushing prices higher. Although volatile, this trend has significantly benefited trend followers with wide stops while testing the strategies of shorter-term trend followers. The key question remains: will cocoa prices rebound to their previous high from late April 2024?

Sugar prices surged by 3.61% this week, driven by strong demand and supply constraints in key markets. Contributing factors include adverse weather conditions in major sugar-producing countries like Brazil and India, coupled with rising global demand for sugar in food and ethanol production. This bullish move is challenging trend followers who are holding short positions at present. Has the bearish trend in sugar finally lost momentum?

Rough rice experienced a significant increase of 2.97%, fuelled by concerns over crop conditions and robust demand. Adverse weather in key rice-producing areas and heightened consumption, especially in Asia, have driven prices upward. The persistent uncertainty regarding crop yields continues to bolster the upward trend in rice prices, creating opportunities for trend followers. This week's rise aligns with the overall mild bullish trend observed in rough rice since early 2020.

The Euro Stoxx 50 index increased by 2.36%, reflecting positive economic data from the Eurozone. Stronger-than-expected GDP growth improved industrial production figures, and optimistic business sentiment have contributed to the index's rise. This positive movement indicates investor confidence in the Eurozone's economic recovery, benefiting those positioned long on European equities. For medium to long-term trend followers, this upward movement would have reinforced long positions, which have been in place since the uptrend was confirmed in late 2020.

What’s Moving Down

Oats prices fell sharply by -10% this week, influenced by improved crop conditions and increased supply expectations. Favourable weather in key growing regions has boosted crop prospects, leading to an anticipated surplus that has driven prices down. This significant drop in oats prices underscores the market's sensitivity to changes in weather and supply forecasts. Despite the sharp decline, no signs exist yet that the congestion phase in Oats noted since late 2022 has ended.

Wheat prices fell by 7.63%, driven by favourable weather conditions and strong harvest forecasts. Increased rainfall in key wheat-producing regions has improved crop conditions, leading to higher yield expectations and, consequently, lower prices. This decline highlights the market's sensitivity to changes in agricultural forecasts and weather patterns. This week's drop continues a broader downward trend that has been evident since mid-2022. For medium to long-term trend followers, maintaining small-ish short positions in this asset is likely.

Platinum prices decreased by 6.87% this week, driven by reduced industrial demand and a stronger US dollar. The slowdown in the automotive industry, which is a significant consumer of platinum for catalytic converters, coupled with the stronger dollar making platinum more expensive for foreign buyers, has exerted downward pressure on prices. This trend reflects broader concerns about the demand for industrial metals in a fluctuating economic environment. For medium to long-term trend followers, this week's decline in platinum prices fits into a broader pattern of volatility observed over the past few years. The longer-term price chart shows frequent oscillations between $800 and $1,200, indicating a lack of sustained trend in either direction. Trend followers likely perceive this recent move as part of the ongoing choppy trading range.

The Volatility Index (VIX), often referred to as the "fear index," fell by 5.73% this week, indicating a reduction in market volatility and investor uncertainty. As an index closely related to equity markets, the VIX measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. A decline in the VIX reflects a calmer market environment with fewer geopolitical and economic shocks, leading to a more stable investment climate. This reduced volatility suggests that investors are less anxious about potential market swings, resulting in lower demand for hedging strategies.

Since early 2020, the VIX has exhibited an overall declining trend in volatility, particularly following the sharp spikes during the initial outbreak of the COVID-19 pandemic. This sustained decline in volatility implies that markets have gradually adjusted to the new normal, with investors growing more confident in economic stability and steady growth. For trend followers and other market participants, a lower VIX often correlates with more mean-reverting market conditions but can also signal smoother overall trends in equity markets, making it easier to identify and capitalize on prevailing market directions. This long-term decrease in volatility underscores a period of relative market stability in the US equities market, enhancing the predictability and consistency of trends for medium to long-term investors.

Canola prices dropped by 4.77% this week, driven by improved weather conditions and higher supply expectations. Favourable growing conditions in major producing areas have boosted crop prospects, leading to anticipated higher supplies and consequently lower prices. This decline highlights the agricultural market's sensitivity to changes in weather and crop forecasts.

For medium to long-term trend followers, this week's price movement fits within a broader context of significant volatility seen over the past few years. The long-term chart shows a dramatic rise in canola prices from mid-2020 to early 2022, followed by a steep decline as supply conditions improved and demand stabilized. Trend followers would likely view this recent drop as a continuation of the downward trend that has been in place since the peak in early 2022. They might have already positioned themselves short during the downtrend or are continuing to hold short positions, capitalizing on the persistent bearish sentiment in the market. The current move reinforces their strategy of riding the long-term downward trend while staying alert to any potential reversals driven by new supply or demand factors.

Summary

The week ending June 7, 2024, presented a mixed landscape for trend followers, marked by diverse trend drivers and a weakening trend environment. The Trend Barometer dropped from 50 to 41, reflecting this shift.

Energy and certain agricultural commodities, like natural gas and cocoa, experienced notable gains, while metals and soft commodities saw significant declines. Bond prices modestly rose, and equity indices and currencies slightly decreased, highlighting the diverse market movements.

Energy's overall positive price move this week was driven primarily by a significant surge in natural gas prices due to higher demand expectations and supply concerns. However, given the recent congestion phase in natural gas, trend followers likely did not benefit from this move. Conversely, the metals sector, particularly platinum, suffered from a stronger US dollar and reduced industrial demand. Soft commodities like soybean oil and canola also faced declines due to improved weather conditions and increased supply expectations.

A detailed analysis of the top market movers underscored the varying impacts on different asset classes. Natural gas, cocoa, and sugar exhibited positive price moves, whereas oats, wheat, and platinum faced negative moves. The Volatility Index's decline suggested reduced market volatility for US equities, pointing to a potentially more stable investment climate.

Overall, the current market conditions reflect a challenging whipsaw environment for trend followers. Some sectors show potential for bullish breakouts, while others continue their downward trends. As we move forward, it will be crucial to monitor these developments closely and adapt strategies accordingly to navigate the evolving market landscape effectively.

Stay tuned for next week's update as we continue to track and analyse the trends in the futures markets.

List of Resources used in the Week in Review

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