Trend Following - Week in Review - November 22, 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.

"Divergence Defines the Day: Favourable Benchmarks, Mixed Realities"

As of November 21, 2024, the SG Trend Index recorded a month-to-date (MTD) gain of 2.89%, with the year-to-date (YTD) performance standing at 0.77%. These numbers indicate a continuation of favourable trending conditions in the benchmarks, albeit with slightly moderated momentum compared to last week’s MTD of 3.17%.

The TTU Trend Barometer, which measures the strength of trends across markets, registered a reading of 45%, slightly down from last week's 48%. While this suggests the environment remains moderately supportive, the experiences of individual managers tell a more nuanced story.

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

Despite these promising benchmark results, 2024 continues to be a year marked by divergence. Not all trend followers are experiencing the same level of success, with significant variability in outcomes depending on market exposures, strategy selection, and adaptability to challenging conditions. Some managers have managed to capitalize on opportunities in trending markets like energy and soft commodities, while others have struggled with reversals and heightened volatility in sectors like bonds and currencies.

This dispersion underscores the complexity of this year’s market environment. While benchmarks like the SG Trend Index point to overall positivity, they mask the challenges faced by many individual managers. The reality for some has been less about steady gains and more about navigating a landscape of uneven opportunities, where risk management and flexibility have proven critical.

As we approach the end of the year, divergence remains the theme of the day. The gap between benchmark performance and individual manager results serves as a reminder that while broad trends might indicate favourable times, success in systematic trading ultimately hinges on the ability to align strategy with market conditions. This week’s results reflect the ongoing need for discipline and adaptability in a market environment where favourable benchmarks do not guarantee universal success.

Weekly Asset Class Snapshot

In the past week, asset classes exhibited a wide range of movements influenced by a mix of economic data releases, shifting monetary policy expectations, and geopolitical developments:

• Volatility Index (VIX): The VIX declined by -2.30%, reflecting reduced market uncertainty. This dip corresponds with a more optimistic tone in equity markets, as strong U.S. corporate earnings and easing recession fears helped stabilize investor sentiment.
• Soft Commodities: Soft commodities gained 2.79%, continuing their upward trajectory. Cocoa and coffee led the charge, driven by persistent supply concerns in key producing regions and ongoing regulatory uncertainties in Europe. Cocoa prices remain buoyant due to poor weather conditions in West Africa, while Brazil’s dry spell and EU deforestation regulations added upward pressure on coffee.
• Metals: The metals sector rebounded with a 3.96% gain, led by gold and palladium. Renewed demand for safe-haven assets supported gold prices, while palladium benefited from increased industrial demand. The rally came despite a strong U.S. dollar, which usually weighs on metals, as traders balanced currency effects against geopolitical risks and global industrial trends.
• Grains: Grains declined by -1.87%, reflecting favourable harvest conditions in key producing regions, which bolstered supply. Wheat, in particular, saw downward pressure from strong Russian exports and competitive global pricing, offsetting concerns about longer-term production risks due to climate factors.
• Energy: The energy sector surged 5.27%, driven by a significant rebound in crude oil prices. Both WTI and Brent crude gained amid OPEC signalling potential supply cuts, as well as seasonal demand increases for heating oil. Natural gas also saw a sharp rise, supported by colder weather forecasts and tighter production in the U.S. after disruptions from recent storms.
• Currencies: Currencies saw a slight decline of -0.15%, reflecting stability in forex markets. The U.S. dollar continued to show strength, buoyed by hawkish comments from Federal Reserve officials and resilient U.S. economic data, but its upward momentum was tempered by mixed global inflation trends.

This week’s movements highlight the interplay of diverse factors shaping global markets. Soft commodities and energy exhibited strong trending behaviour, providing fertile ground for trend-followers, while grains and currencies reflected muted or opposing dynamics. Metals rebounded sharply, defying typical headwinds from the strong dollar, and volatility eased amid improving sentiment in equities. These dynamics reinforce the need to monitor economic, geopolitical, and seasonal drivers to effectively navigate the evolving financial 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

Natural Gas: +10.82%

Natural gas futures experienced a significant surge of 10.82% this week, marking a notable shift in the commodity's performance. This increase is attributed to several key factors:

• Colder Weather Forecasts: Anticipation of colder-than-usual temperatures across much of the United States has heightened expectations for increased heating demand, contributing to the price rise.
• Supply Dynamics: The U.S. Energy Information Administration (EIA) reported a storage draw of 3 billion cubic feet for the week ending November 15th, contrasting with expectations of a 5 billion cubic feet build. This unexpected drawdown reflects a tighter supply scenario.
• LNG Export Demand: Elevated demand for U.S. liquefied natural gas (LNG) exports, particularly to Europe, has further tightened domestic supply. LNG feed gas flows have risen to a 10-month high, driven by supply concerns in Europe ahead of the year-end.

From a technical perspective, natural gas prices have been confined within a congestion zone since February 2023. The recent breakout above the $3.30/MMBtu level suggests the potential emergence of a bullish trend. For trend-following traders, this development may signal the beginning of a sustained upward movement, offering opportunities to capitalize on the evolving market dynamics.

However, it's essential to approach this potential trend with caution. The natural gas market is influenced by various factors, including weather patterns, production levels, and geopolitical events, which can introduce volatility. Therefore, while the current indicators are promising, continuous monitoring and adaptive strategies remain crucial for effectively navigating this market.

Palladium: +7.60%

Palladium prices experienced a notable increase of 7.60% this week, a movement that may have posed challenges for trend followers positioned within the prevailing bearish trend. Several factors contributed to this bullish reversal:

• Geopolitical Tensions: Escalating geopolitical tensions, particularly involving Russia—a major palladium producer—have raised concerns about potential supply disruptions. The possibility of sanctions on Russian exports has heightened market uncertainty, leading to speculative buying and upward pressure on prices.
• Industrial Demand Fluctuations: Despite a general decline in demand due to the automotive industry's shift towards electric vehicles, short-term industrial demand for palladium has shown variability. This includes increased use in hybrid vehicles, which continue to rely on palladium for catalytic converters, thereby providing intermittent support to prices.
• Market Speculation and Short Covering: The recent price surge may also be attributed to speculative activities and short covering by traders anticipating potential supply constraints or reacting to sudden market movements.

For trend-following traders, this week's upward movement in palladium represents a counter-trend rally within a broader bearish context. Such reversals can lead to challenges, including potential drawdowns or the triggering of stop-loss orders. This scenario underscores the importance of robust risk management strategies and the need for adaptability in response to sudden market shifts. While the long-term outlook for palladium remains influenced by factors such as the transition to electric vehicles and evolving industrial applications, short-term price movements can be significantly impacted by geopolitical events and market sentiment.

Coffee: +6.92%

Coffee prices surged by 6.92% this week, continuing a robust bullish trend that has presented lucrative opportunities for trend-following traders. Several key factors have contributed to this upward momentum:

• Supply Constraints: Adverse weather conditions in major coffee-producing regions, notably Brazil, have led to concerns over reduced yields. Prolonged droughts and irregular rainfall patterns have negatively impacted crop development, tightening global supply.
• Regulatory Developments: The European Union's deforestation regulations have introduced uncertainties in the coffee supply chain. These policies aim to limit imports of products linked to deforestation, potentially affecting coffee sourced from regions where deforestation is prevalent. Such regulatory measures have added upward pressure on prices due to anticipated supply disruptions.
• Rising Production Costs: Increased costs for fertilizers, labour, and transportation have elevated production expenses for coffee growers. These higher costs are often passed down the supply chain, contributing to elevated coffee prices.

For trend-following traders, the sustained bullish trajectory in coffee prices has been highly favourable. The market's consistent upward movement provides clear signals for maintaining or expanding long positions.

Crude Oil WTI: +6.37%

West Texas Intermediate (WTI) crude oil prices rose by 6.37% this week, reaching a two-week high of $71.24 per barrel.

This increase is primarily attributed to escalating geopolitical tensions, particularly the intensification of the Russia-Ukraine conflict, which has heightened concerns over potential disruptions in oil supply. Additionally, the U.S. imposed new sanctions on Russia's Gazprombank and banned imports from about 30 Chinese companies, while China announced measures to boost trade and energy imports.

Despite this upward movement, the overall trend in WTI crude oil remains uncertain. The recent price increase may not have provided a clear signal for trend-following traders, who typically seek sustained directional movements. For those holding bearish positions, this week's rise could have resulted in unfavourable outcomes. The market continues to be influenced by a complex interplay of geopolitical events, economic indicators, and policy decisions, making it challenging to establish a definitive trend. As such, traders may remain cautious, awaiting more consistent signals before committing to new positions.

Crude Oil Brent: +5.97%

Brent crude oil prices climbed by 5.97% this week, reflecting a strong recovery similar to its WTI counterpart.

This rise comes amidst escalating geopolitical tensions, with the ongoing Russia-Ukraine conflict raising concerns about potential disruptions to global oil supplies. Additionally, sanctions on Russian energy exports and China's increased import measures to bolster its energy security have added to the bullish momentum in Brent prices.

For trend followers, Brent's recent price movement offers a situation akin to WTI. While the rebound signals short-term strength, it does not necessarily mark the start of a sustained trend. Traders who have been sidelined may find the lack of a clear directional pattern challenging, while those holding bearish positions may have faced setbacks.

Brent, as the global benchmark, continues to reflect the broader uncertainty in the oil markets. Factors such as OPEC's supply strategies, global demand outlooks, and geopolitical developments will likely dictate whether the current upward movement evolves into a long-term trend or remains a temporary spike. For now, patience remains key for trend followers awaiting stronger, more definitive signals.

What’s Moving Down

Canola: -8.40%

Canola prices declined by 8.40% this week, aligning with the prevailing bearish trend and presenting favourable conditions for trend-following traders. Several factors contributed to this downward movement:

• Increased Global Supply: Recent reports indicate that Canada's canola production may be higher than previously estimated, with expectations that the 2024/25 Canadian canola crop is likely smaller than official estimates, prompting end users to enter the market early.
• Weakening Demand: A lack of end-user demand contributed to the declines, with exporters and domestic crushers thought to be covered for the time being.
• Technical Selling Pressure: Speculative funds were adding to their short positions as canola fell below nearby chart support levels, indicating a bearish sentiment among traders.

For trend-following traders, this week's decline in canola prices reinforces the existing bearish trend, providing opportunities to maintain or expand short positions. However, it's essential to remain vigilant, as market dynamics can shift due to factors such as weather conditions, policy changes, and global economic developments. Continuous monitoring and adaptive strategies are crucial to effectively navigate the evolving landscape of the canola market.

Soybean Oil: -7.66%

Soybean oil prices declined by 7.66% this week, aligning with the medium- to long-term bearish trend and presenting favourable conditions for trend-following traders. Several factors contributed to this downward movement:

• Increased Production Forecasts: Improved weather conditions in major soybean-producing regions, such as the United States and Brazil, have led to higher yield expectations, easing concerns about supply constraints.
• Weaker Demand: A softening in global demand for biodiesel, which utilizes soybean oil as a primary feedstock, has further pressured prices. The broader edible oil market has also seen declining prices, reflecting an easing of prior disruptions in global supply chains.
• Technical Selling Pressure: Speculative funds were adding to their short positions as soybean oil fell below nearby chart support levels, indicating a bearish sentiment among traders.

For trend-following traders, this week's decline in soybean oil prices reinforces the existing bearish trend, providing opportunities to maintain or expand short positions. However, it's essential to remain vigilant, as market dynamics can shift due to factors such as weather conditions, policy changes, and global economic developments.

Lumber: -2.56%

Lumber prices declined by 2.56% this week, presenting challenges for trend-following traders who may have held long positions. Several factors contributed to this downward movement:

• Weakening Housing Market: The U.S. housing market has experienced a slowdown, with residential construction declining. This reduction in building activity has led to decreased demand for lumber, exerting downward pressure on prices.
• Increased Supply: Despite the demand slowdown, lumber production has remained steady, leading to an oversupply in the market. This surplus has further contributed to the decline in prices.
• Economic Uncertainty: Broader economic uncertainties, including fluctuating interest rates and inflation concerns, have impacted consumer confidence and spending on housing, indirectly affecting lumber demand.

For trend-following traders, this week's decline in lumber prices may have resulted in unfavourable outcomes, especially for those holding long positions.

VIX: -2.30%

The Volatility Index (VIX), often referred to as the "fear gauge," declined by 2.30% this week, reflecting reduced market uncertainty. This drop coincides with improved investor sentiment, bolstered by strong corporate earnings reports and a stabilization in broader equity markets. A lower VIX generally suggests that market participants are perceiving less risk, which aligns with easing recession fears and more stable macroeconomic conditions.

While VIX futures are not typically traded by trend followers, they serve as an essential barometer of overall market sentiment. A declining VIX can indicate a more stable environment for equities, potentially reducing opportunities for significant price moves that trend followers rely on. Conversely, a rising VIX often signals increased volatility and potential trend development across asset classes.

For trend-following strategies, the drop in the VIX this week may point to a market environment where trends in certain sectors, particularly equities, could become less pronounced. However, it remains crucial to monitor shifts in volatility, as changes in the VIX can signal broader transitions in market dynamics that impact trend development.

Soybeans: -1.38%

Soybean prices declined by 1.38% this week, continuing to align with the broader bearish trend. Much like soybean oil, this move reinforces the favourable environment for trend-following traders who have been positioned short in this market. The price action this week marked a reversion back into the prevailing bearish trend, offering an opportunity for traders to maintain or extend their positions.

The downward pressure on soybean prices can be attributed to favourable weather conditions in key producing regions, including the United States and South America, which have bolstered crop yields and increased global supply. Additionally, softened demand from major importers, coupled with subdued biodiesel market activity, has further weighed on prices.

For trend followers, this week’s move reaffirms the consistency of the bearish trend in soybeans, with market dynamics continuing to support a downtrend. However, as with any agricultural commodity, vigilance is necessary due to the potential for sudden weather-related disruptions or shifts in global demand that could impact the trajectory of this trend.

Conclusion

This week in trend-following has underscored the diverse and often divergent forces shaping market performance in 2024. While benchmarks like the SG Trend Index and the TTU Trend Barometer reflect broadly supportive conditions, the dispersion in manager outcomes tells a more nuanced story. Opportunities have been abundant in trending markets such as natural gas, coffee, and soft commodities, where consistent upward or downward movements have rewarded systematic approaches. However, reversals in markets like palladium and the indecisive nature of crude oil trends have highlighted the challenges of maintaining alignment with broader benchmarks.

Energy and soft commodities continued to lead the charge this week, offering fertile ground for trend-followers to capitalize on supply disruptions and shifting demand dynamics. On the other hand, bearish trends in grains, soybean oil, and canola reaffirmed their reliability for systematic traders, while sectors like lumber and metals demonstrated the importance of risk management and adaptability in the face of fluctuating demand and macroeconomic uncertainties.

As we approach the end of 2024, divergence remains the prevailing theme. The broader positive signals from benchmarks conceal the uneven terrain individual managers are navigating. Success in this environment requires not just discipline and adherence to proven processes but also the flexibility to adjust to dynamic market conditions. In this landscape of mixed fortunes, trend-following strategies continue to demonstrate their resilience, thriving in pockets of opportunity while managing the inevitable challenges of a complex and unpredictable market environment.

List of Resources used in the Week in Review

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