Trend Following - Week in Review - November 08, 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 New Dawn: U.S. Election Boosts Market Sentiment and Trend Resilience"

As of November 7, 2024, the SG Trend Index reflects a positive start to November, showing a month-to-date (MTD) gain of 1.61%. This has brought the year-to-date (YTD) result closer to breakeven, now at -0.48%, a relief after October’s MTD decline of -3.98% and a YTD drop of -1.78%.

The U.S. election outcome has injected a dose of optimism into the markets, sparking bullish trends, particularly among U.S. equity indices. The renewed market sentiment has set a hopeful tone, reinforcing expectations for a brighter economic future.

This week, the TTU Trend Barometer registered a reading of 39%, up from last week’s 32%, signalling a “moderately weak” trend environment. The Barometer’s rise reflects growing optimism and stability, as markets respond positively to the post-election landscape.

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

The recent U.S. presidential election has significantly influenced futures price movements across various asset classes. The election outcome has instilled renewed confidence in the U.S. economy, leading to notable shifts in market dynamics.

• Volatility Index (VIX): The VIX experienced a sharp decline of -24.35%, reflecting reduced market uncertainty following the election results. This decrease indicates a more stable environment for investors and trend followers.
• Equity Indices: U.S. equity indices surged by +3.26%, driven by investor optimism regarding the new administration's economic policies. The anticipation of pro-business initiatives has bolstered market sentiment, leading to significant gains in stock prices.
• Bonds: Bonds edged up by +0.25%, as cautious optimism post-election influenced expectations around U.S. monetary policy. Investors are closely monitoring potential policy shifts that could impact interest rates and bond yields.
• Metals: Metals rose by +1.02%, benefiting from renewed economic confidence and serving as a hedge against potential inflation. The prospect of increased infrastructure spending under the new administration has also contributed to the rise in metal prices.
• Energy: The energy sector declined by -4.05%, impacted by global supply dynamics and evolving demand expectations. While the election outcome has influenced market sentiment, factors such as OPEC+ production decisions and global economic recovery continue to play a significant role in energy prices.
• Currencies: Currencies remained mostly stable with a slight dip of -0.06%, as the U.S. dollar adjusted post-election. The currency markets are reflecting a wait-and-see approach, with traders assessing the potential impact of forthcoming fiscal and monetary policies.

The U.S. election has been a pivotal event this week, shaping futures price movements across various asset classes. The resulting market optimism is evident in the surge of equity indices and the decline in volatility, while other sectors adjust to the evolving economic landscape.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

• Russell 2000: +8.61%

The Russell 2000 index, representing U.S. small-cap stocks, saw a remarkable surge of 8.61% this week, which has been a significant boost for trend followers holding long positions. This impressive performance can be attributed to the recent U.S. presidential election outcome, which has instilled a sense of renewed confidence among investors, especially in the small-cap sector.

The election has brought with it an optimistic outlook for domestic economic policy, particularly with expectations that the new administration will favour pro-business initiatives. Small-cap stocks, which tend to be more sensitive to U.S. economic policies due to their domestic focus, are anticipated to benefit from potential tax reforms and reduced regulatory burdens. This sentiment has driven a rally in small caps, as investors view them as particularly well-positioned to gain from an environment with fewer regulatory constraints and possible tax advantages.

Beyond policy expectations, the overall market sentiment post-election has been marked by a surge in optimism. Investors are eagerly repositioning their portfolios to capture the potential growth ahead, and small-cap stocks, known for their agility and growth potential, have attracted significant interest. This shift reflects a broader anticipation that a supportive economic environment may foster rapid expansion for these companies.

For medium to long-term trend followers, the Russell 2000's strong upward movement aligns well with a bullish outlook. The weekly chart indicates a clear and consistent uptrend, reinforcing the case for maintaining or even adding to long positions.

Nevertheless, it’s essential to exercise caution, as the post-election rally may lead to heightened volatility. Implementing disciplined risk management strategies will be key in navigating any sudden market fluctuations that may emerge as initial euphoria gives way to the realities of policy implementation and economic conditions.

• Nasdaq 100: +5.33%

The Nasdaq 100 index, which tracks the performance of the 100 largest non-financial companies listed on the Nasdaq stock exchange, experienced a significant increase of 5.33% this week. This upward movement continues the bullish trend that has been favourable for trend followers.

The recent U.S. presidential election has played a pivotal role in boosting investor confidence, particularly in the technology sector. The election outcome has reduced market uncertainty, leading to increased optimism about the economic policies that may favour tech companies. Additionally, strong earnings reports from major tech firms have reinforced positive sentiment, contributing to the index's rise.

For medium to long-term trend followers, the Nasdaq 100's consistent upward trajectory aligns well with a bullish outlook. The weekly chart indicates a clear and sustained uptrend, suggesting that maintaining or initiating long positions could be advantageous.

• Soybean Oil: +5.29%

Soybean oil prices rose by 5.29% 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. Trend followers should closely monitor this development and consider adjusting their strategies accordingly to mitigate potential losses and capitalize on emerging opportunities.

• Coffee: +4.73%

Coffee prices surged by 4.73% this week, a movement that has been well-received by trend followers who have maintained long positions in the commodity. This upward shift aligns with the broader bullish trend and offers a welcome recovery after recent declines over the past few weeks.

The rise in coffee prices is influenced by several key factors, primarily adverse weather conditions in major coffee-producing regions like Brazil. Unfavourable weather patterns, including droughts and unexpected frosts, have affected coffee yields, raising concerns about potential supply shortages. Additionally, ongoing supply chain disruptions have exacerbated the situation, with logistical challenges and higher transportation costs creating bottlenecks in the distribution of coffee beans. These disruptions, coupled with rising production costs for labour and inputs, have further tightened supply, contributing to the recent price increase.

For medium to long-term trend followers, this price recovery reinforces the prevailing bullish outlook on coffee. The weekly chart reflects renewed upward momentum, suggesting that maintaining long positions remains favourable.

S&P500: +4.61%

The S&P 500 index experienced a significant increase of 4.61% this week, reinforcing the long-term bullish trend that has been favourable for trend followers. This upward movement is largely attributed to the recent U.S. presidential election outcome, which has bolstered investor confidence and optimism regarding future economic policies.

The election results have reduced market uncertainty, leading to increased investor optimism about potential pro-business policies and economic growth. This sentiment has driven a rally in the stock market, with the S&P 500 reaching new highs.

For medium to long-term trend followers, the S&P 500's consistent upward trajectory aligns well with a bullish outlook. The weekly chart indicates a clear and sustained uptrend, suggesting that maintaining or initiating long positions could be advantageous. However, it's essential to remain vigilant for any signs of trend reversal or market corrections, as the post-election optimism may lead to increased volatility.

What’s Moving Down

• VIX Futures: -24.35%

The CBOE Volatility Index (VIX), often referred to as the "Fear Index," experienced a significant decline of 24.35% this week, indicating a substantial reduction in market volatility. This sharp drop is primarily attributed to the resolution of uncertainties surrounding the recent U.S. presidential election, which has bolstered investor confidence and stabilized market sentiment.

While trend followers may not commonly trade VIX futures directly, the VIX serves as a crucial indicator of equity market volatility. A declining VIX suggests a more stable and less volatile market environment, which can be favourable for trend-following strategies in equity markets. Lower volatility often corresponds with more predictable market movements, allowing trend followers to identify and capitalize on sustained trends more effectively.

However, it's important to note that a rapidly declining VIX can also signal complacency among investors, potentially leading to unforeseen market corrections. Therefore, while the current decrease in the VIX reflects a more stable market environment, trend followers should remain vigilant and continue to employ robust risk management practices to navigate any unexpected market shifts.

• Palladium: -10.49%

Palladium prices declined by 10.49% this week, aligning with the long-term bearish trend that has been favourable for trend followers holding short positions. This significant drop is primarily attributed to a combination of factors affecting both demand and supply dynamics.

On the demand side, the automotive industry, which accounts for a substantial portion of palladium consumption, has been shifting towards electric vehicles (EVs) that do not require palladium in their catalytic converters. Additionally, automakers are increasingly substituting palladium with platinum due to cost considerations, further reducing demand.

Supply factors have also played a role in the price decline. Despite geopolitical tensions, major producers like Russia have maintained steady output, alleviating concerns of supply shortages that could have otherwise supported prices.

For medium to long-term trend followers, this downward movement reinforces the existing bearish outlook on palladium. The weekly chart indicates a continuation of the downtrend, suggesting that maintaining short positions could be advantageous.

• Oats: -9.08%

Oats experienced a significant price decline of 9.08% this week, reflecting the commodity's ongoing volatility and lack of clear directional movement. This sharp drop is primarily attributed to favourable weather conditions in major oat-producing regions, leading to improved harvest yields and increased supply. Additionally, a decrease in demand from the livestock feed sector has contributed to the downward pressure on prices.

For medium to long-term trend followers, the current market environment presents challenges. The weekly chart illustrates a congested pattern with significant price fluctuations, lacking a clear 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 likely to remain on the sidelines, awaiting more stable and predictable market conditions before committing to new positions.

• Lean Hogs: -4.13%

Lean hog futures saw a decline of 4.13% this week, a movement that offered mixed conditions for trend followers. The recent drop aligns with a shorter-term bearish trend, benefiting those who have positioned short. However, the lean hog market remains challenging due to its inherent volatility and rapid price changes, which make it difficult to establish and hold consistent positions.

The downward pressure on lean hog prices can be attributed to a combination of seasonal, demand-driven, and cost-related factors. Autumn typically brings an increase in slaughter numbers, leading to a higher pork supply that depresses prices.

Additionally, fluctuations in export demand, particularly changes in purchasing patterns from major importers, have influenced price dynamics. Feed cost variations also impact production expenses, indirectly affecting the market price for lean hogs.

For medium to long-term trend followers, navigating the lean hog market requires careful risk management. The recent decline supports the current bearish outlook, yet the market’s unpredictable nature means that trend followers must stay alert to shifting conditions. Cautious monitoring and strategic adjustments are essential in dealing with the complex and volatile lean hog market effectively.

• Silver: -3.84%

Silver prices declined by 3.84% this week, presenting challenges for trend followers who have been capitalizing on a sustained 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

This week’s review reflects a vibrant and optimistic start to November, driven largely by the positive impact of the recent U.S. presidential election on market sentiment. The election has acted as a catalyst for renewed confidence, especially in U.S. equity indices, with small-cap stocks and the tech-heavy Nasdaq 100 showing remarkable gains. Trend followers have seen favourable conditions in these sectors, aligning with the broader bullish sentiment.

At the same time, the reduction in the Volatility Index (VIX) has signalled a less anxious market, as the perceived risks surrounding policy changes and regulatory adjustments have been tempered by the new administration's pro-business stance. Investors are cautiously optimistic, with bond markets responding with modest gains, while precious metals like silver have faced downward pressure due to profit-taking and a stronger dollar. In the agricultural sector, coffee and soybean oil have shown significant upward movements, driven by supply concerns and increased demand, while oats and lean hogs have exhibited declines due to seasonal dynamics and supply factors.

For trend followers, this period emphasizes the importance of adaptive strategies and disciplined risk management. While certain markets present clear bullish opportunities, others remain volatile or congested, requiring a prudent approach. The U.S. election has undeniably reinvigorated market momentum, yet the outlook remains complex, with varying conditions across asset classes. As November unfolds, trend followers must remain vigilant, ready to navigate both the opportunities and challenges that come with evolving economic policies and market adjustments. The path forward may be filled with optimism, but resilience and careful positioning will be essential to capitalizing on these dynamic trends.

List of Resources used in the Week in Review

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