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Trend Following - Week in Review - November 29, 2024

Trend Following - Week in Review - November 29, 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.

"Surf's Up: Riding the Waves of Trend Following – 29 November 2024"

As of November 28, 2024, the SG Trend Index recorded a month-to-date (MTD) gain of 3.04%, raising its year-to-date (YTD) performance to 0.92%. This represents a modest improvement from last week's MTD of 2.89% and YTD of 0.77%, signalling a favourable environment for trend-following strategies throughout much of November. While equities delivered robust contributions to the month's performance, they were not the sole driver of this momentum. Strong trends in key markets, particularly in soft commodities like coffee and cocoa, also played a significant role in boosting results.

The TTU Trend Barometer, however, registered a reading of 41, down from last week's 45. This decrease reflects a slight softening in the overall trend environment, suggesting fewer markets are exhibiting strong and sustained directional movements. Nevertheless, the continuation of significant trends in select markets, such as the persistent upward trajectory in coffee and cocoa, has provided ample opportunities for systematic traders to capitalize on momentum.

November's broader market landscape presented a fertile ground for trend-following strategies. In addition to equities, which saw gains of 5.7% for the S&P 500 and 7.5% for the Dow Jones Industrial Average, the energy and soft commodity sectors have been particularly dynamic. Coffee continued its bullish ascent, driven by persistent weather-related supply constraints and regulatory concerns in key producing regions. Similarly, cocoa maintained its strength, buoyed by production shortfalls and ongoing supply chain disruptions in West Africa. These strong, sustained trends in soft commodities have been a boon for trend-following strategies, offering diversification beyond traditional equity markets.

This week's trading was also influenced by the Thanksgiving holiday in the United States, which traditionally signals lighter trading volumes and a more subdued market environment. The holiday season often results in reduced liquidity, which can temper the formation and strength of trends. Despite these conditions, the persistence of strong trends in soft commodities underscores the resilience of specific market opportunities, even in a lighter trading environment.

Looking ahead, the interplay between seasonal dynamics and the continuation of strong trends in key markets will shape the close of 2024. The softer TTU Trend Barometer reading highlights the importance of vigilance and flexibility, as trend-followers adjust to evolving market conditions. While lighter trading volumes may introduce challenges, the broader positive backdrop—spanning equities, commodities, and more—suggests continued opportunities for systematic strategies to thrive as the year winds down.

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

Weekly Asset Class Snapshot

Source: Finwiz.com

This week, movements across asset classes reflected diverse influences ranging from macroeconomic data to geopolitical events. Here’s a detailed breakdown of the notable percentage changes and the factors driving them:

  • Volatility Index (VIX): -7.57%: The sharp decline in the VIX reflects significantly reduced market uncertainty. This drop can be attributed to a combination of easing recession fears, stabilizing equity markets, and strong U.S. economic data. Additionally, the lighter trading volume surrounding the Thanksgiving holiday contributed to the lower perceived risk environment. With equities maintaining momentum, the VIX trended downward in line with improving investor sentiment.
  • Grains: -0.88%: Grains saw a slight decline this week, driven by favourable harvest conditions in key producing regions such as the U.S. and South America. Increased supply from strong wheat exports out of Russia and competitive pricing in global markets placed downward pressure on the grain sector. This comes despite ongoing concerns over long-term production risks tied to climate factors.
  • Meats: +0.99%: The meat sector showed a modest gain as strong seasonal demand and improving export trends lifted prices. The upcoming holiday season typically boosts consumption of beef and pork, with additional support from rising international demand, particularly in Asian markets.
  • Bonds: +1.43%: The bond market experienced gains this week as U.S. Treasury yields retreated slightly after recent highs. This movement reflects a combination of Federal Reserve commentary hinting at a more cautious approach to future rate hikes and increased demand for fixed-income assets amid stabilizing inflation expectations.
  • Energy: -2.32%: Energy prices declined this week, with both crude oil and natural gas under pressure. Crude oil experienced a pullback as concerns about OPEC's potential supply cuts diminished and traders adjusted positions following last week’s rally. Natural gas, which saw significant gains earlier in November, softened due to improved production levels and mixed weather forecasts, tempering bullish sentiment.
  • Metals: -2.09%: The metals sector dipped this week, with palladium and platinum leading the declines. This drop comes as the dollar strengthened slightly and industrial demand for these metals showed mixed signals. Additionally, profit-taking by investors following recent rallies in safe-haven metals like gold weighed on the sector.
  • Soft Commodities: +1.42%: Soft commodities maintained positive momentum, bolstered by ongoing supply constraints in coffee and cocoa. Coffee prices surged due to unfavourable weather in Brazil and regulatory uncertainties in Europe. Cocoa benefited from continued production challenges in West Africa, further tightening global supplies and supporting prices.
  • Equity Indexes: +0.82%: Equities delivered another solid week of gains, driven by better-than-expected U.S. GDP growth and strong corporate earnings reports. The S&P 500 and Dow Jones maintained their upward trajectories, further buoying investor confidence and contributing to one of the best Novembers for equity markets in recent years.
  • Currencies: +1.07%: Currencies showed modest gains, with the U.S. dollar continuing to exhibit strength. This movement reflects ongoing confidence in the U.S. economy and a divergence in global monetary policy, as other central banks, such as the ECB and Bank of Japan, signal a more dovish outlook compared to the Federal Reserve.

This week’s asset class moves highlight a tug-of-war between improving economic conditions and shifting market dynamics. Equities and soft commodities shone, riding strong momentum, while energy and metals stumbled under mixed signals.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.

Source: Finwiz.com

What’s Moving Up

Coffee: +6.04%

Coffee prices surged by 6.04% this week, extending an impressive rally that has brought the market to its highest levels in nearly 47 years. This continued strength reflects a confluence of factors that have tightened global supplies and fuelled robust demand. In Brazil, the world's largest coffee producer, a combination of severe droughts and heavy rains has severely impacted crop yields, raising concerns about future shortages. Adding to the supply pressures, farmers in Brazil have delayed delivering this year’s harvest, exacerbating the tightness and creating financial challenges for traders managing dwindling inventories.

Beyond weather-related issues, regulatory changes are also playing a role in the market's dynamics. The European Union's upcoming anti-deforestation laws have prompted importers to secure supplies in advance, further driving up prices as companies look to safeguard their inventories against future regulatory hurdles. This environment of constrained supply and heightened demand has created fertile ground for sustained upward momentum in coffee prices.

The weekly chart reflects this strong trend, with prices consistently climbing to higher highs and maintaining bullish momentum. The 6.04% increase over the past week reinforces the clear directional movement that trend-following traders rely on. For these systematic traders, coffee has been a standout performer, offering significant opportunities to capture gains in a well-defined and persistent uptrend.

In this favourable environment, trend-following strategies have thrived, capitalizing on the strong and steady momentum in coffee prices. As the market continues to respond to supply constraints, weather challenges, and regulatory shifts, coffee remains a powerful contributor to positive results for systematic trading approaches.market.

JPY: +3.38%

The Japanese yen appreciated by 3.38% this week, marking a significant shift in its recent performance. This movement is largely attributed to higher-than-expected inflation data from Tokyo, which has intensified expectations of an imminent interest rate hike by the Bank of Japan (BOJ). Specifically, Tokyo's core consumer price index, excluding fresh food, rose by 2.2% year-on-year in November, surpassing forecasts and suggesting that the BOJ may tighten monetary policy sooner than anticipated. 

The yen's strengthening to levels below ¥150 against the U.S. dollar reflects this shift in market sentiment. However, this appreciation poses challenges for trend-following traders who have been capitalizing on the yen's prolonged depreciation. The sudden reversal likely resulted in losses for those holding short positions, as their strategies are typically designed to profit from sustained trends rather than abrupt changes.

In summary, the yen's recent appreciation, driven by unexpected inflation data and potential BOJ policy changes, has disrupted existing trends, presenting difficulties for trend-following traders accustomed to the yen's prior downward trajectory.

Source: Finwiz.com

Cocoa: +3.38%

Cocoa prices climbed 3.38% this week, continuing a robust bullish trend that has been advantageous for trend-following traders. This upward movement is part of a significant rally, with cocoa futures surging over 16% in November, surpassing 100% gains year-to-date amid persistent supply shortages. 

The primary drivers of this price increase include ongoing supply constraints from major cocoa-producing regions, particularly in West Africa. Poor harvests in countries like Ivory Coast and Ghana have tightened global supplies, contributing to the price surge. 

Additionally, international buyers have injected substantial funds into Ghana's cocoa industry through advanced payments to Cocobod, the state marketing board, aiming to mitigate losses from declining production. 

Despite some recent volatility, the strength of the rises over recent weeks suggests the potential for new highs in the future. The consistent upward trajectory indicates sustained buying interest, reinforcing the bullish momentum. For trend-following traders, this environment has been particularly favourable, allowing them to capitalize on the strong and persistent uptrend in cocoa prices.

The combination of supply shortages, strategic financial interventions, and strong demand continues to drive cocoa prices higher, offering profitable opportunities for trend-following strategies.aintaining or expanding long positions.

Source: Finwiz.com

30 Year Bond: +2.79%

The U.S. 30-year Treasury bond saw a significant price rally this week, with yields dropping to 4.36% from earlier levels of 4.48%. This movement reflects growing demand for long-term Treasuries, driven by a combination of political developments and shifting economic expectations. The nomination of Scott Bessent as the next U.S. Treasury Secretary has been a key factor, as his reputation as a fiscal conservative and moderate policymaker has boosted investor confidence. Market participants anticipate that Bessent will prioritize deficit control and adopt a measured approach to trade tariffs, fostering a favourable environment for Treasury bonds.

In addition to the political landscape, economic data and Federal Reserve policy expectations have played a significant role. October’s strong consumer spending figures showcased the resilience of the U.S. economy, while persistent inflation concerns have led to speculation about a potential 25-basis-point rate cut by the Federal Reserve in December. This expectation of a more accommodative monetary stance has further fuelled the rally in long-term Treasury prices, sending yields lower.

For trend-following traders, this unexpected shift presented challenges. Many traders were likely positioned short in the 30-year bond market, banking on the continuation of rising yields and declining prices that had defined the broader trend in recent months. The sudden rally disrupted this bearish momentum, leading to unfavourable outcomes for systematic strategies dependent on sustained trends. Such reversals underscore the complexities of navigating markets influenced by a mix of political, economic, and monetary factors.

This week’s rally in the 30-year Treasury bond highlights the unpredictable nature of financial markets, where shifts in sentiment and policy expectations can quickly reverse established trends.

Source: Finwiz.com

Natural Gas: +2.46%

Natural gas prices rose by 2.46% this week, signalling a potential shift toward a bullish trend after a prolonged period of consolidation since early 2023. This uptick is influenced by several factors impacting supply and demand dynamics.

In Europe, colder-than-expected weather has increased heating demand, leading to early withdrawals from gas storage facilities. Notably, the UK's largest storage site, Rough, began injecting gas into the network earlier than usual this winter, reflecting concerns over supply adequacy. 

Simultaneously, U.S. liquefied natural gas (LNG) exports are nearing record levels, driven by heightened global demand and fewer operational disruptions. The Freeport LNG plant, the nation's second-largest exporter, has ramped up output, contributing to increased supply to international markets. 

These developments have tightened the global natural gas market, supporting recent price increases. The weekly price chart indicates a potential breakout from the consolidation phase, with prices approaching previous resistance levels. If this momentum continues, it could confirm the onset of a new bullish trend.

For trend-following traders, this emerging pattern offers promising opportunities. Identifying and capitalizing on sustained upward movements could lead to favourable outcomes, provided that the trend solidifies in the coming weeks.

The combination of increased demand due to colder weather and robust LNG exports has set the stage for a potential bullish trend in natural gas prices, presenting advantageous conditions for trend-following strategies.

What’s Moving Down

VIX Futures: -7.57%

The Cboe Volatility Index (VIX), commonly known as Wall Street's "fear gauge," declined by 7.57% this week, bringing it to levels not seen since early 2023. This decrease indicates a significant reduction in market anxiety, as the VIX measures expected volatility in the S&P 500 over the next 30 days. The current low levels suggest that investors anticipate a period of relative calm in the equity markets.

This decline in the VIX aligns with a broader trend observed throughout November, where the index has plunged approximately 36.6%. Such a substantial drop reflects increased investor confidence, likely influenced by positive economic indicators and a stable geopolitical environment.

While VIX futures are not typically a focal point for trend-following traders, the index serves as a crucial barometer of market sentiment. A low VIX corresponds with reduced volatility, which can impact the performance of trend-following strategies. In low-volatility environments, markets may exhibit fewer pronounced trends, potentially leading to fewer opportunities for trend-followers to capitalize on significant price movements.

Conversely, a high VIX indicates heightened market uncertainty and increased volatility, conditions that often give rise to more substantial and sustained trends across various asset classes. Therefore, monitoring the VIX provides valuable insights into the prevailing market climate, helping traders adjust their strategies accordingly.

The recent decline in the VIX to very low levels suggests a market environment characterized by stability and reduced volatility. For trend-following traders, this may signal a period where strong, sustained trends are less prevalent, underscoring the importance of adapting strategies to current market conditions.strategies are crucial to effectively navigate the evolving landscape of the canola market.

Source: Finwiz.com

Gasoline RBOB: -5.52%

Gasoline RBOB futures saw a significant decline of 5.52% this week, mirroring the broader weakness across the energy sector. This movement aligns well with the strategies of trend-following traders, who are likely positioned bearishly in the current market environment. The price drop reflects a combination of factors weighing on gasoline markets.

Ongoing concerns about global energy demand have played a pivotal role. The Organization of the Petroleum Exporting Countries (OPEC) recently lowered its 2024 oil consumption forecast for the fourth consecutive month, signalling reduced demand expectations. This bearish outlook has intensified pressure on gasoline prices, particularly as inventories remain robust, creating a supply-demand imbalance that favours lower pricing.

Seasonal trends have also contributed to the decline. The transition to winter-blend gasoline, which is cheaper to produce, has led to the usual seasonal softening in prices during this time of year. This factor, combined with broader market dynamics, has accelerated the downward momentum in gasoline futures.

For trend-following traders, the sustained bearish trajectory in gasoline RBOB has provided an opportunity to profit from short positions. The consistent alignment of market fundamentals with the existing trend has reinforced their ability to capture gains as the market continues its decline.

Overall, the drop in gasoline RBOB futures reflects a perfect storm of weakening demand forecasts, ample supply, and seasonal factors. For systematic traders, this environment has been highly favourable, offering opportunities to capitalize on the clear and persistent downward trend.conditions, policy changes, and global economic developments.

Source: Finwiz.com

Crude Oil WTI: -4.34%

West Texas Intermediate (WTI) crude oil prices fell by 4.34% this week, continuing a broader decline across the energy sector. This downward move has been favourable for trend-following traders, many of whom are likely holding bearish positions in alignment with the market's prevailing trend.

The price drop can be traced to a combination of geopolitical developments, market fundamentals, and inventory data. The announcement of a cease-fire between Israel and Hezbollah has eased concerns about potential disruptions to Middle Eastern oil supplies, effectively reducing the geopolitical risk premium that had been supporting oil prices. At the same time, OPEC+ postponed its much-anticipated meeting on potential production cuts, rescheduling it from November 30 to December 5. This delay has introduced uncertainty into the market, contributing to a bearish sentiment as traders wait for clarity on future supply adjustments.

Adding to the pressure on WTI prices, the Energy Information Administration reported an unexpected increase in U.S. gasoline inventories, suggesting a potential slowdown in demand. This rise in inventories has compounded concerns about weaker consumption, further weighing on crude oil prices.

For trend-following traders, this combination of factors has created an ideal environment to capitalize on the sustained bearish momentum. The alignment of geopolitical shifts, supply dynamics, and market fundamentals with the broader downtrend has enabled traders to benefit from short positions as crude oil prices continue to decline.

The drop in WTI crude oil prices reflects a confluence of easing geopolitical tensions, uncertainties around OPEC+ decisions, and rising U.S. gasoline inventories. These factors have reinforced the bearish trend, providing lucrative opportunities for systematic trading strategies.d in unfavourable outcomes, especially for those holding long positions.

Source: Finwiz.com

Crude Oil Brent: -3.46%

Brent crude oil prices declined by 3.46% this week, mirroring the downturn observed in West Texas Intermediate (WTI) crude. This decline has been advantageous for trend-following traders who have maintained short positions in the market.

The price reduction is attributed to several factors. The cease-fire between Israel and Hezbollah has alleviated concerns about potential disruptions in Middle Eastern oil supplies, leading to a decrease in the geopolitical risk premium previously factored into oil prices. 

Additionally, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) postponed a critical meeting on production cuts from November 30 to December 5, introducing uncertainty regarding future supply adjustments and contributing to bearish sentiment in the market. 

For trend-following traders, the sustained decline in Brent crude oil prices has presented profitable opportunities. The alignment of market fundamentals with the prevailing bearish trend has enabled traders to capitalize effectively on short positions.

In summary, the combination of easing geopolitical tensions and uncertainties surrounding OPEC+ production decisions has driven Brent crude oil prices lower, creating a favourable environment for trend-following strategies.

Heating Oil: -3.45%

Heating oil prices declined by 3.45% this week, aligning with the broader downturn observed across the energy sector. This movement has been favourable for trend-following traders who have maintained short positions in the market.

The price reduction can be attributed to several factors. The cease-fire between Israel and Hezbollah has alleviated concerns about potential disruptions in Middle Eastern oil supplies, leading to a decrease in the geopolitical risk premium previously factored into oil prices. 

Additionally, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) postponed a critical meeting on production cuts from November 30 to December 5, introducing uncertainty regarding future supply adjustments and contributing to bearish sentiment in the market. 

For trend-following traders, the sustained decline in heating oil prices has presented profitable opportunities. The alignment of market fundamentals with the prevailing bearish trend has enabled traders to capitalize effectively on short positions.

In summary, the combination of easing geopolitical tensions and uncertainties surrounding OPEC+ production decisions has driven heating oil prices lower, creating a favourable environment for trend-following strategies.

Source: Finwiz.com

Conclusion

This week’s trends offered a rich tapestry of market movements, reflecting the complexities and opportunities of the current financial landscape. While equities continued their upward trajectory, soft commodities like coffee and cocoa showcased their resilience with sustained bullish momentum, delivering strong returns for systematic traders. The energy sector, on the other hand, maintained its downward slide, with crude oil, gasoline, and heating oil all presenting favourable conditions for trend-following strategies driven by bearish positions.

The Thanksgiving holiday brought lighter trading volumes, often associated with subdued market dynamics, yet key opportunities emerged in sectors where strong trends persisted. Notably, coffee reached multi-decade highs, and cocoa continued its remarkable rally, both bolstered by supply constraints and regulatory influences. Meanwhile, natural gas hinted at the start of a potential bullish breakout, adding further intrigue to the evolving market landscape.

As the TTU Trend Barometer dipped to 41, it signalled a slightly softer overall trend environment, underscoring the need for vigilance as we approach the close of the year. While the broader positive backdrop across equities, soft commodities, and select markets remains supportive, the interplay of geopolitical events, seasonal factors, and economic signals continues to demand adaptability and precision.

The week reinforced the core tenets of systematic trading: discipline, the ability to adapt to shifting conditions, and a focus on capitalizing on the trends that endure amidst a constantly changing market environment. As December unfolds, traders must remain attuned to these dynamics, seizing opportunities while navigating the challenges of the year’s final chapter.

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List of Resources used in the Week in Review

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