Trend Following - Week in Review - October 17, 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.

"Markets Stabilize as Trend Followers See a Modest Rebound Amid Volatility"

The trend-following environment improved marginally this week, with the TTU Trend Barometer rising to 27 from last week’s reading of 20, indicating slightly more favourable conditions for identifying trends. However, uncertainty around global economic factors and geopolitical tensions continues to create hurdles.

As of October 16, 2024, the SG Trend Index is down -2.83% month-to-date (MTD), a notable recovery from last week’s -5.21% MTD. Year-to-date (YTD), the index now stands at -0.61%, also an improvement over last week’s -3.75%. Despite these better results, the market remains volatile, and sustained trends are still difficult to capture consistently.

The market has offered pockets of opportunities, but false breakouts and whipsaws remain prevalent, making it a challenging environment for systematic trend-following strategies that depend on clear directional moves.

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 landscape has shown early signs of recovery for trend followers after a challenging month. While market conditions remain turbulent, some improvement is evident, offering pockets of opportunity amidst ongoing volatility.

Volatility Index (VIX): The VIX has declined by -3.67%, indicating a temporary easing in market anxiety, though the overall geopolitical backdrop remains tense. The conflict in the Middle East continues to introduce uncertainty in global markets, particularly energy, but some investors are seeing this as a sign of a potential stabilization in the near term. Volatility remains elevated, with lingering concerns about U.S. interest rates and the potential for inflation volatility due to geopolitical risk​.

Energy Sector: Energy was hit hardest this week, with the sector posting a significant decline of -5.89%. The continued sell-off in oil markets reflects growing recession fears and softening demand forecasts, particularly as the Middle East conflict has not yet escalated to major supply disruptions. However, traders remain cautious as any escalation in geopolitical tensions could quickly reverse this trend​.

Grains: Grains were down -1.14% this week, as better-than-expected weather conditions and strong harvests in key growing regions, particularly in South America, helped ease earlier supply concerns. The improved outlook for grain production has put downward pressure on prices, challenging trend followers who had anticipated a continuation of previous upward movements​.

Metals: The metals sector declined -0.68%, with mixed performance across individual metals. Industrial metals like copper struggled due to weakened demand from the construction and manufacturing sectors, especially in China, which is experiencing a notable economic slowdown. However, precious metals like gold saw modest gains as investors sought safe-haven assets amidst ongoing market volatility​.

Soft Commodities: Soft commodities stood out this week, rising by +1.05%. The upward movement was primarily driven by a strong performance in Orange Juice, which posted significant gains due to tight supply conditions in major producing regions like Brazil and Florida. The rally in soft commodities provides some relief to trend followers, although opportunities remain selective​.

Currencies: Currency markets were relatively flat, declining by -0.60%. Major currency pairs remained range-bound, with ongoing uncertainty surrounding U.S. monetary policy and global economic growth. The lack of clear directional movement has made it difficult for trend-following strategies to capitalize on strong currency trends​.

Bonds: Bonds dipped slightly by -0.16%, as rising U.S. bond yields continue to weigh on bond prices. Strong economic data and the prospect of prolonged interest rate hikes have contributed to bond market declines, presenting difficulties for trend followers who had been positioned for a more stable interest rate environment​.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

• Orange Juice: +7.19%

For this week's Orange Juice Futures, which surged by 7.19%, trend followers likely saw this as a continuation of the long-term bullish trend, as reflected in the chart below. The price has been steadily climbing since early 2022, reaching multi-decade highs. For systematic traders, this upward momentum offers a favourable environment, particularly for those positioned long in the market. The clear pattern of higher highs and higher lows provides a strong signal of sustained trend development, making it an ideal scenario for trend-following strategies.

The primary drivers behind this week’s price surge are several ongoing supply-side challenges. The most critical issue is the continued impact of citrus greening disease, which is devastating orange groves in key producing regions like Brazil and the United States. This incurable disease is leading to reduced yields and a dwindling supply of oranges globally. Brazil, the largest exporter of orange juice, is facing one of its worst harvests in recent memory, with some estimates suggesting a production shortfall of 24% compared to last year. This follows years of already declining inventories, creating a severe supply squeeze.

Extreme weather has also played a significant role. Devastating heatwaves and floods have further damaged crops, compounding the impact of disease and driving prices higher. Florida's orange production has similarly suffered due to a combination of hurricanes and the spread of citrus greening, exacerbating global shortages​.

For trend followers, the current bullish environment in orange juice futures offers a clear and sustained trend, but with prices nearing record highs, the question remains whether this momentum can be sustained or if a correction is imminent. The fundamental supply issues suggest that the market may remain tight in the near term, but traders will need to stay vigilant for any shifts in market dynamics.

• Cocoa: +2.07%

For Cocoa, which posted a 2.07% gain this week, trend followers are likely observing a volatile yet potentially rewarding market. The price chart indicates the market has experienced significant fluctuations, with a steep rally earlier this year followed by an ongoing consolidation phase. Cocoa’s strong upward trend earlier in 2024 saw prices rise to record highs, but since then, sharp corrections have introduced challenges, especially for systematic traders trying to navigate erratic price movements.

The current price environment continues to be driven by a persistent supply shortage. The West African region, particularly Côte d'Ivoire and Ghana, which produces over 70% of the world's cocoa, has been facing severe weather disruptions and the spread of diseases like Cocoa Swollen Shoot Virus Disease (CSSVD). These conditions have significantly reduced yields, with Ghana’s cocoa production down by about 35% and Côte d'Ivoire experiencing similar declines. Climate volatility, particularly erratic rainfall, has further exacerbated these issues, making supply even more unpredictable​.

Adding to this is the logistical disruption caused by geopolitical tensions, including the recent conflict in the Middle East, which has led to increased shipping costs. Additionally, elevated fertilizer prices due to the ongoing Ukraine war have discouraged proper crop maintenance, worsening the supply situation​.

For trend followers, the challenge with cocoa lies in the rapid price swings, which create a difficult environment to capture sustained profits. While the long-term trend remains bullish, the erratic nature of recent movements calls for careful risk management to avoid being caught in sharp reversals. However, the underlying supply concerns suggest that the market could remain tight, potentially offering further opportunities for upside in the medium term.

• Russell 2000: +2.03%

For this week’s Russell 2000 Futures, which climbed by 2.03%, trend followers likely see this as a promising development, reflecting a rebound from the recent choppy market environment. This rise is significant because the Russell 2000 comprises smaller, more domestically focused U.S. companies, which are generally more sensitive to economic growth and interest rate changes.

The primary driver behind this week’s upward movement is renewed optimism around the U.S. economy, spurred by recent economic data indicating resilience in domestic growth and a better-than-expected retail sales report. Investors are also reacting positively to the expectation that interest rates may not rise much further, as inflation pressures have shown signs of easing​.

Moreover, the small-cap sector, represented by the Russell 2000, tends to benefit more from domestic economic policy shifts, including potential subsidies and tax cuts aimed at smaller businesses. This aligns with the growing anticipation of favourable policies in light of the upcoming U.S. presidential election​.

For trend followers, this price action marks a potential continuation of a bullish breakout from the 2022 range, offering an ideal scenario for traders positioned long. However, given the inherent volatility of small-cap stocks, it's important to remain cautious of potential reversals if market conditions shift unexpectedly.

• DAX: +1.81%

For DAX Futures, which rose by 1.81% this week, trend followers likely see this as part of a strong bullish momentum that has been building since mid-2023. The DAX index continues to benefit from positive sentiment surrounding expected rate cuts by the European Central Bank (ECB). Market participants are anticipating cuts in both October and December, which have driven demand for DAX-listed stocks. Moreover, recent stimulus measures from China have bolstered optimism, particularly benefiting Germany’s export-heavy economy, despite broader economic concerns in the region.

For systematic traders, the DAX's clear uptrend and strong technical indicators signal potential for continued upside, especially with the current environment favouring risk-on assets amid dovish monetary policy expectations. However, traders should remain cautious as inflation and economic data releases could still create volatility in the near term.

Gold: +1.2%

For Gold, which rose by 1.2% this week, trend followers are likely seeing continued bullish momentum, driven by several factors. The ongoing geopolitical tensions, particularly the Middle East conflict, have pushed investors toward safe-haven assets like gold. Additionally, there are growing expectations that the Federal Reserve will pause interest rate hikes, further supporting gold’s upward movement. Inflation concerns and global uncertainty remain key drivers behind the demand for gold, positioning it as a hedge against both market volatility and inflationary pressures.

What’s Moving Down

• Natural Gas: -10.64%

For the Natural Gas futures, which experienced a significant drop of -10.64% this past week, trend followers likely found this market particularly volatile. Natural gas prices have been oscillating between sharp peaks and steep declines due to a combination of fundamental and technical factors. The price drop this week reflects multiple ongoing pressures on the natural gas market.

One of the main contributors to this decline is the historically high U.S. natural gas inventory levels. These stockpiles remain well above the five-year average, easing any concerns over supply shortages for the upcoming winter. The market is also reacting to milder weather forecasts, which have reduced the demand for natural gas in power generation for heating purposes.

Additionally, market analysts expect demand to pick up again later in the year, but in the short term, the abundant supply, combined with lower-than-expected demand, has put downward pressure on prices. There is also increased production in the U.S., which is outstripping consumption, contributing further to the price decline.

For trend followers, navigating this market has been challenging, with prices fluctuating significantly and making it difficult to maintain consistent positions. The ongoing volatility in natural gas, driven by both weather patterns and fluctuating demand expectations, will likely continue to pose challenges for systematic traders trying to capitalize on clear trends.

• Heating Oil: -6.45%

For Heating Oil, which dropped by -6.45% this week, trend followers are likely holding short positions, given the clear downtrend that has persisted since mid-2022. The price chart shows consistent lower highs and lower lows, signalling a bearish market environment. This kind of sustained downward momentum typically encourages systematic traders to remain positioned short to capture profits from the declining trend.

The price decline this week can be attributed to several factors. Demand for heating oil has remained subdued as mild autumn weather in key markets has delayed the typical seasonal increase in heating demand. Additionally, there are concerns over excess supply, with distillate inventories remaining robust. Despite ongoing geopolitical risks, such as tensions in the Middle East, no significant disruptions to oil supplies have occurred, keeping downward pressure on heating oil prices.

Given the current technical setup and market conditions, trend followers are likely to maintain short positions unless a significant change in demand or supply dynamics reverses the market’s trajectory. As winter approaches, it will be crucial to monitor any shifts in weather patterns or geopolitical events that could trigger a reversal.

• Crude Oil Brent: -6.22%

For Brent Crude Oil, which fell by -6.22% this week, trend followers are likely maintaining short positions given the continued downward trend that has been evident since early 2022. The price chart shows a gradual decline, with no clear signs of reversal, making it favourable for traders positioned for further downside. The recent price action reinforces the bearish sentiment surrounding oil markets.

Several factors contributed to this week's decline. One of the most prominent drivers is the increased supply concerns due to the slowing demand outlook. Weaker economic data from major economies like China and Europe has weighed heavily on expectations for oil demand, which has been exacerbated by ongoing recession fears. Additionally, despite geopolitical tensions, including ongoing conflicts in the Middle East, there have been no significant supply disruptions to push prices higher.

The global oil market also remains well-supplied, with production from the U.S. and other non-OPEC producers continuing at steady levels, offsetting any concerns about OPEC+ production cuts. As a result, the bearish sentiment has prevailed, driving prices lower.

For trend followers, the current environment suggests that short positions remain favourable, with a clear bearish structure evident on the chart. However, as with any market, monitoring for potential shifts in supply, demand, or geopolitical factors remains key to managing risk in a volatile environment.

• Crude Oil WTI: -6.21%

For WTI Crude Oil, which fell by -6.21% this week, the price action closely mirrors that of Brent Crude, given the highly correlated nature of these two key global oil benchmarks. Both WTI and Brent often move in tandem as they are affected by the same global supply and demand factors, including geopolitical risks, economic data, and production decisions by major oil-producing nations.

This week’s steep decline in WTI, similar to Brent, was driven by concerns over slowing demand as economic data from China and Europe indicated weaker growth prospects. Additionally, the market remains well-supplied, with U.S. oil production remaining resilient. The ongoing geopolitical issues, such as conflicts in the Middle East, have not led to major supply disruptions, reducing any immediate upward pressure on prices.

For trend followers, both WTI and Brent are showing clear signs of a bearish trend, as indicated by their similar price action. The chart patterns for both markets are showing lower highs and lower lows, reinforcing the idea that short positions remain favorable in this environment. However, given the high correlation between these two benchmarks, any significant movement in one is likely to impact the other, making it important for traders to monitor global factors that affect the broader oil market.

• Gasoline RBOB: -5.03%

For Gasoline RBOB, which dropped by -5.03% this week, the chart reflects a downtrend that has persisted for much of 2023. The market has shown a pattern of lower highs and lower lows, which suggests that trend followers likely continue to favour short positions. The price action indicates bearish momentum, and traders positioned for further downside have likely benefited from this week's decline.

The drivers behind this drop are multifaceted. Seasonal factors play a significant role, with gasoline demand typically falling after the peak summer driving season. Additionally, refinery maintenance and steady output have maintained supply levels, contributing to the price pressure. The global macroeconomic environment, with concerns about potential economic slowdowns and lower demand, has further added to the bearish sentiment.

From a technical perspective, the downtrend remains intact, and with no immediate signs of a reversal, trend-following strategies focused on short positions likely continue to be rewarded. However, as always, traders should monitor for any potential disruptions in supply or unexpected demand shifts that could change the current trajectory.

Conclusion

This week has offered a modest rebound for trend-following strategies, with the TTU Trend Barometer ticking up from 20 to 27, and the SG Trend Index recovering some of its recent losses. However, despite the improvement, market volatility remains a major hurdle, driven by ongoing geopolitical tensions, macroeconomic uncertainties, and erratic market movements.

Pockets of opportunity did emerge, particularly in sectors like soft commodities, with Orange Juice continuing its upward surge due to supply-side challenges, while Gold held steady amidst heightened geopolitical risk. On the other hand, the energy sector faced significant headwinds, with sharp declines in Natural Gas, Heating Oil, and Crude Oil, reflecting concerns about global demand and softening economic data from major economies.

The mixed performance across asset classes suggests that while some markets are showing signs of recovery, others continue to present significant challenges for systematic traders. The trend-following environment, while improved, remains delicate, with traders needing to remain agile and vigilant for shifts in market dynamics. As always, robust risk management will be key to navigating the ongoing turbulence and capitalizing on emerging trends in the weeks ahead.

Looking forward, the volatility in global markets will likely continue, making trend identification crucial, but tricky. For trend followers, staying disciplined in this uncertain environment remains paramount.

List of Resources used in the Week in Review

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