Trend Following - Week in Review - November 01, 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 Month Full of Twists and Turns: Navigating October's Market Whipsaws"

As of October 31, 2024, the SG Trend Index closed the month with a month-to-date (MTD) decline of -3.98%, deepening from last week's -3.55% MTD. This brings the year-to-date (YTD) return to -1.78%, reflecting the hurdles CTAs faced throughout October. The month’s market narrative was defined by high volatility, rapid reversals, and limited trending behaviour, presenting a real test for trend followers.

October, along with the first trading day of November, was marked by sharp turns and sudden reversals, creating a challenging landscape for trend followers. This week, the TTU Trend Barometer settled at 32%, well below last week's 41%, signalling a "moderately weak" trend environment. These conditions make it difficult for trend followers to find consistent directional movement amid frequent shifts. While market volatility moderated, with the VIX rising 2.78% this week compared to last week’s 8.74% increase, the overall environment remains tense and unpredictable.

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’s market presented further twists, with asset classes reacting to economic data and global events in divergent ways.

• Volatility Index (VIX): The VIX rose 2.78%, signalling continued market caution amidst a mix of geopolitical tensions and inflation worries. While this increase was moderate, it reflects the market’s anxious sentiment and challenges trend followers in managing risk.
• Energy: The energy sector dropped sharply by -4.24%, reversing its prior rally as demand expectations fluctuated amidst an unstable geopolitical backdrop. This sector continues to reflect the volatile twists that have defined October.
• Metals: Metals declined by -3.19%, with industrial metals especially impacted by global economic uncertainty. This drop adds to recent struggles in the sector, which has seen sentiment-driven swings throughout the month.
• Soft Commodities: Soft commodities offered a glimmer of stability, rising by +1.63%, led by continued resilience in cocoa and orange juice. Supply-side constraints remain in focus, creating selective opportunities within the sector.
• Currencies: Currency markets remained largely range-bound, with a minor dip of -0.33%, as U.S. monetary policy uncertainty kept currencies in a holding pattern, lacking clear trends for followers.
• Equity Indices: Equity indices fell by -0.72%, with smaller-cap indexes like the Russell 2000 under particular pressure. Persistent economic and inflationary concerns have weighed heavily on equity markets, causing continued twists in the trend landscape.
• Bonds: Bonds declined by -0.86%, reflecting higher U.S. bond yields as strong economic data points to potential continued rate hikes. This ongoing trend of rising yields presents a headwind for trend followers in the fixed-income space.

With October now behind us, the month’s twists and turns across sectors highlight the importance of agility and disciplined risk management for trend followers. While isolated gains in sectors like soft commodities offered some relief, the broader market context remains challenging. Navigating an unpredictable landscape requires resilience, adaptability, and a commitment to disciplined strategy execution.

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: +7.75%

Cocoa prices surged by 7.75% this week, reflecting ongoing volatility in the market. This increase is primarily attributed to persistent supply concerns from major cocoa-producing regions. In Côte d’Ivoire, the world's leading cocoa producer, the government raised the farmgate price by 20% to 1,800 CFA francs per kilogram, effective October 1, 2024, to support farmers amidst challenging conditions. Additionally, heavy rains in West Africa have caused flooding, delaying harvests and affecting bean quality, further tightening supply.

For medium to long-term trend followers, this week's sharp rise in cocoa prices presents challenges. The market has exhibited an extreme whipsaw environment, with rapid price reversals making it difficult to maintain consistent positions. The weekly chart illustrates these abrupt movements, highlighting the lack of a clear, sustained trend. Such conditions necessitate cautious risk management and may prompt trend followers to reduce exposure until a more stable trend emerges.

• Lumber: +5.77%

Lumber prices increased by 5.77% this week, continuing a bullish trend observed in the daily chart below. This upward movement is primarily driven by a rebound in U.S. housing demand, which has been a significant factor influencing lumber prices. Analysts anticipate that this demand will push lumber prices higher in 2024, as large U.S. homebuilders order wood to begin construction in the coming months.

For medium to long-term trend followers, this consistent upward trajectory is favourable. The daily chart indicates a clear bullish trend, suggesting potential opportunities for those positioned accordingly. However, it's essential to remain vigilant, as the lumber market has historically been volatile, with prices influenced by factors such as supply chain disruptions and changes in housing market dynamics.

• Lean Hogs: +5.43%

Lean hog futures experienced a 5.43% increase this week, reflecting a volatile market environment characterized by rapid price fluctuations. This surge is primarily attributed to strong U.S. pork export data, with the USDA reporting a 4% increase in pork exports for 2024, reaching 7.08 billion pounds. Additionally, U.S. pork production is projected to rise by about 2% to 27.88 billion pounds in 2024.

For medium to long-term trend followers, the current whipsaw environment presents challenges. The attached weekly chart illustrates abrupt price movements, lacking a clear, sustained trend. Such conditions make it difficult to maintain consistent positions, as sudden reversals can lead to potential losses.

• Soybean Oil: +5.16%

Soybean oil prices rose by 5.16% this week, a movement that may have been unfavourable for trend followers holding bearish positions. This increase is primarily attributed to a surge in demand for biofuels, particularly biodiesel, which utilizes soybean oil as a key feedstock. Additionally, recent adverse weather conditions in major soybean-producing regions have raised concerns about supply constraints, further supporting the price uptick.

For medium to long-term trend followers, this upward movement challenges existing bearish positions. The attached weekly chart indicates a potential shift in momentum, suggesting that the previous downtrend may be reversing.

Oats: +4.67%

Oats prices increased by 4.67% this week, reflecting ongoing volatility within a congested market pattern. This uptick is primarily attributed to supply concerns stemming from adverse weather conditions in key producing regions. In Canada, for instance, heavy rains have delayed harvests, impacting yield quality and quantity. Additionally, global demand for oats has remained robust, particularly in the health food sector, further supporting prices.

For medium to long-term trend followers, the current market environment presents challenges. The attached weekly chart illustrates a lack of clear directional movement, with prices oscillating within a defined range, indicative of a congestion pattern. Such conditions make it difficult to establish and maintain positions, as the absence of a definitive trend increases the risk of false signals and potential losses.

What’s Moving Down

• Natural Gas: -14.33%

Natural gas prices declined by 14.33% this week, continuing to trade within a defined range without a clear breakout. This significant drop is attributed to a combination of mild weather conditions reducing heating demand, high inventory levels that remain above the five-year average, and record-high production rates contributing to oversupply.

For medium to long-term trend followers, the current market environment presents challenges. The weekly chart shows natural gas prices oscillating within a range, lacking a clear directional trend. Such conditions make it difficult to establish and maintain positions, as the absence of a definitive trend increases the risk of false signals and potential losses. Trend followers are advised to exercise caution, employing stringent risk management strategies and awaiting a breakout before committing to new positions.

• Palladium: -8.16%

Palladium prices dropped by 8.16% this week, benefiting trend followers who have maintained a bearish outlook. The recent decrease reflects several key factors. Demand for palladium has been waning as automakers shift towards electric vehicles, which do not require palladium in their components. Additionally, the automotive industry is increasingly substituting palladium with platinum due to its lower cost, further eroding demand.

On the supply side, while Russia—a major palladium producer—continues to face the prospect of sanctions, recent reports suggest that production has remained steady, easing supply concerns that could otherwise support prices.

For medium to long-term trend followers, this decline reinforces the bearish trend that has been in place for some time. What initially appeared to be a potential breakout to the upside may have been a false signal, as the weekly chart indicates a continuation of the downtrend. Trend followers positioned on the short side are likely to benefit from this ongoing weakness, though it’s essential to monitor for any signs of reversal or unexpected shifts in the supply-demand balance.

• Gasoline RBOB: -3.65%

Gasoline RBOB futures declined by 3.65% this week, supporting a bearish outlook for trend followers. The price decrease can be attributed to the seasonal decline in demand, as the end of the summer driving season typically leads to reduced gasoline consumption. Additionally, U.S. gasoline inventories have remained stable, with stockpiles slightly higher than last year, adding downward pressure to prices. Broader weaknesses in the oil market have also influenced gasoline prices, with recent factors such as resolved disputes affecting Libyan oil output and weak manufacturing data from China contributing to the decline.

For medium to long-term trend followers, this steady downward movement aligns well with a bearish stance. The attached weekly chart shows a sustained downtrend, indicating that those holding short positions may continue to benefit from this environment. Nonetheless, it remains important to stay alert, as market conditions could change due to unexpected geopolitical events or shifts in the supply-demand balance. Effective trend navigation will require continuous monitoring and disciplined risk management.

• Crude Oil Brent: -3.60%

Brent crude oil prices fell by 3.60% this week, reinforcing the prevailing bearish outlook. This decline is attributed to a combination of easing geopolitical tensions, economic concerns, and stable supply dynamics. Recent developments in the Middle East, particularly a de-escalation of conflicts involving Israel and Iran, have lessened fears of potential disruptions to oil supply. Israel's measured response to Iran, avoiding critical oil infrastructure, has significantly reduced the risk premium associated with potential supply threats from the region.

In addition, ongoing worries about a slowdown in global economic growth, especially in major economies like China, have dampened demand forecasts for crude oil. Analysts have pointed out that OPEC+ production capacity has helped to mitigate any significant price increases despite the tensions in the Middle East. Furthermore, U.S. crude oil production remains robust, contributing to ample supply levels in the market. Although OPEC+ has plans to increase output in December, there may be delays due to expected seasonal demand drops in early 2025.

For medium to long-term trend followers, this steady downward movement aligns well with a bearish stance. The attached weekly chart indicates a sustained downtrend, suggesting that those holding short positions may continue to benefit from this environment. However, staying vigilant is essential, as market dynamics could shift unexpectedly due to geopolitical events or changes in the supply-demand balance. Continuous monitoring and disciplined risk management are crucial for effectively navigating and capitalizing on the current trend.

• Silver: -3.56%

Silver prices declined by 3.56% this week, posing challenges for trend followers who have benefited from the recent bullish trend. This downturn is primarily attributed to profit-taking activities following a significant rally earlier in the month, where silver prices surged nearly 42% year-to-date, including a 7.4% rise in October alone.

Additionally, a stronger U.S. dollar has exerted downward pressure on silver prices, as commodities priced in dollars become more expensive for holders of other currencies. The anticipation of the U.S. payrolls data, expected to provide insights into the Federal Reserve's interest rate plans, has also contributed to market uncertainty, influencing precious metal prices.

For medium to long-term trend followers, this pullback may disrupt the established bullish trend. The attached weekly chart indicates that while the overall uptrend remains intact, the recent decline suggests potential consolidation or a correction phase. Trend followers should exercise caution, closely monitoring market developments and economic indicators that could impact silver prices. Maintaining disciplined risk management strategies is essential to navigate potential volatility and capitalize on long-term opportunities in the silver market.

Conclusion

October and the start of November have presented trend followers with a complex and volatile environment, marked by rapid reversals and limited trending behaviour across most sectors. From the TTU Trend Barometer’s reading of 32% to the SG Trend Index’s month-end decline of -3.98%, it’s clear that the current market climate remains challenging. While certain sectors, such as soft commodities, provided pockets of stability, the broader landscape has been shaped by geopolitical tensions, economic uncertainty, and fluctuating demand across asset classes.

Despite these headwinds, this period serves as a reminder of the importance of adaptability, disciplined risk management, and careful strategy execution. Whether dealing with abrupt price surges in cocoa and soybean oil or navigating the persistent bearish trends in crude oil and gasoline, trend followers are being tested on their ability to stay nimble and resilient. As we move deeper into Q4, monitoring market signals closely and adjusting positions accordingly will be crucial to navigating an environment where twists and turns are the new normal. Trend followers should remain vigilant, as opportunities and challenges alike will continue to emerge within this unpredictable landscape.

List of Resources used in the Week in Review

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