Trend Following - Week in Review - October 25, 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.

"Volatility Surges as Trend Followers Face Renewed Market Challenges"

This week, the trend-following environment saw mixed results, with the TTU Trend Barometer rising to 41 from last week’s 27. While this shift from weak to neutral conditions provides some optimism, it’s still below the level that trend followers typically view as favourable. Market volatility has surged, with the VIX climbing by 8.74%, reflecting persistent geopolitical concerns and heightened market anxiety.

As of October 24, 2024, the SG Trend Index is down -3.55% month-to-date (MTD), a further slide from last week’s -2.83% MTD. Year-to-date (YTD), the index now stands at -1.35%, showing the continued difficulty in capturing consistent trends amidst turbulent conditions. The overall environment remains challenging, with whipsaws and false breakouts complicating trend-following efforts and few sustained trends emerging across markets.

Despite these hurdles, specific sectors, including energy and precious metals, showed resilience, offering selective opportunities for trend followers. However, major losses in equities and fixed income, compounded by geopolitical pressures, emphasize the need for disciplined risk management as markets remain highly volatile 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 landscape presented renewed challenges for trend followers, with volatility surging amidst ongoing geopolitical concerns and economic uncertainty. Selective opportunities emerged, but the overall environment remains cautious as traders navigate turbulent market conditions.

• Volatility Index (VIX): The VIX surged by +8.74%, indicating heightened market anxiety driven by geopolitical instability, especially the conflict in the Middle East. Investors remain wary of potential disruptions to global energy supplies and inflation volatility, with U.S. interest rate concerns adding to the mix. Elevated volatility reflects the market's cautious sentiment, underscoring the challenging environment for trend-following strategies.
• Energy Sector: Energy rebounded with a +4.54% increase this week, recovering some recent losses as demand expectations stabilized. While the Middle East conflict has not yet caused major supply disruptions, traders remain on edge, with any escalation likely to impact prices significantly. The sector’s volatile conditions make it both an opportunity and a risk for trend followers.
• Metals: Metals gained +2.93% as safe-haven assets like gold and palladium attracted investor interest amidst global uncertainty. Precious metals showed resilience, though industrial metals continued to face headwinds from slower economic growth, particularly in China. The divergence within the metals sector presents selective opportunities, especially in precious metals.
• Soft Commodities: Soft commodities declined by -1.06%, led by a notable drop in cocoa prices, which fell due to improved supply conditions in West Africa. However, orange juice continued its upward momentum, driven by ongoing supply shortages, highlighting selective opportunities within the soft commodities space.
• Currencies: Currency markets were down -0.79%, remaining largely range bound. Persistent uncertainty around U.S. monetary policy and global economic growth has prevented clear directional moves, making it difficult for trend-following strategies to capitalize on strong currency trends this week.
• Equity Indices: Equity indices fell by -1.77%, with significant losses in smaller-cap indexes like the Russell 2000 and major indices like the Dow Jones. Economic concerns and geopolitical tensions have weighed heavily on equity markets, further complicating the environment for trend followers seeking stable upward trends.
• Bonds: Bonds declined by -0.99% as U.S. bond yields remained elevated, driven by strong economic data and expectations of prolonged interest rate hikes. Fixed income markets continue to face pressure, presenting a challenging environment for trend-following strategies positioned for stability in interest rates.

This week, market volatility and geopolitical instability added layers of complexity to the trend-following landscape. While some asset classes, such as energy and precious metals, offered pockets of opportunity, the broader market faced downward pressure, with equities and fixed income experiencing the greatest challenges. On a single market basis, the Dow Jones, Italian Bonds, and Natural Gas encountered notable difficulties, while Soybean Meal, Live Cattle, and Gold emerged as bright spots with positive performances. Traders will need to remain agile and maintain disciplined risk management as market conditions continue to be volatile and unpredictable.

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: +11.11%

Natural Gas prices rose sharply by 11.11% this week, driven by several key factors. With colder weather approaching in the Northern Hemisphere, there’s an anticipated rise in heating demand, which has created upward pressure on prices. Additionally, the U.S. Energy Information Administration (EIA) projects that natural gas prices will increase as the winter season boosts demand, especially with new LNG export facilities ramping up in Texas and Louisiana. These exports are likely to reduce domestic supply and contribute to higher prices through early 2025​​.

For medium- to long-term trend followers, this strong upward move could be promising, as reflected in the attached chart. While natural gas has been volatile, the recent spike in prices might signal a potential breakout from previous range bound congestion. However, trend followers should remain cautious, as the chart shows a history of sharp corrections and oscillations, suggesting that while a bullish trend might develop, it could be accompanied by significant pullbacks. Consistent monitoring and disciplined risk management will be essential to capitalize on these movements effectively.

• Palladium: +10.89%

Palladium prices saw a significant rise of 10.89% this week, driven largely by shifts in demand dynamics and market sentiment. With concerns about a potential supply squeeze amid economic uncertainty, investors have recently shown renewed interest in palladium, a precious metal critical in automotive catalytic converters. Despite palladium's challenges this year—such as declining demand in the auto sector as manufacturers shift to platinum and electric vehicles—short-term demand fluctuations have created a temporary upward price movement. Additionally, seasonal demand from the automotive sector is expected to provide some support in the coming months, which could sustain this momentum briefly.

For medium- to long-term trend followers, this recent price surge may indicate a potential trend reversal or the beginning of a bullish phase, as suggested by the attached chart. However, it’s essential to be cautious, as palladium has faced persistent volatility, and the medium-term outlook remains uncertain due to anticipated increases in recycling and potential oversupply.

• VIX Futures: +8.74%

This week, the VIX, commonly known as the “fear gauge,” surged by 8.74%, reflecting a significant increase in market volatility and investor anxiety. The VIX, which tracks S&P 500 options volatility, often spikes during periods of heightened uncertainty, driven by factors like geopolitical tensions or economic instability. Recent escalations in the Middle East and persistent inflation concerns have added layers of complexity to the global market, pushing volatility higher.

For trend followers, while the VIX itself isn’t typically traded as a distinct asset, its rise has implications for broader market conditions. Increased volatility often leads to abrupt price swings and can make trend-following strategies more challenging. In such environments, markets may experience more frequent whipsaws and false breakouts, which can disrupt established trends and lead to choppy price action.

Higher volatility requires trend followers to exercise cautious risk management, as the likelihood of reversals and unexpected movements grows. In this context, some trend followers may adjust by reducing position sizes or setting tighter risk controls to mitigate potential losses. Overall, the elevated VIX underscores the need for disciplined strategy execution, as volatility can both erode trend-following gains and present new opportunities when carefully navigated.

• Orange Juice: +6.32%

Orange juice futures surged by 6.32% this week, continuing their remarkable upward trajectory over recent years. This strong trend has been driven by multiple supply-side challenges that have positioned orange juice as one of the standout performers for trend followers, making it a significant outlier in commodities markets. Key factors include prolonged droughts and adverse weather conditions affecting major orange-producing regions, particularly in Florida and Brazil. Additionally, diseases such as citrus greening have severely impacted orange yields, reducing supply at a time when demand remains steady​.

For medium- to long-term trend followers, orange juice has provided a robust, sustained trend, reflecting a clear pattern of higher highs and higher lows over the past few years, as seen in the chart. This rally has allowed systematic traders to capitalize on the long-term bullish momentum. Given the ongoing supply constraints, there may still be room for further upside, though prices are already at multi-decade highs. As always, disciplined monitoring is necessary, as any shifts in weather patterns or improvements in supply conditions could impact the trend.

Soybean Oil: +4.37%

Soybean oil prices rose by 4.37% this week, driven by factors such as ongoing global demand for biofuels and supply disruptions due to unpredictable weather patterns impacting major soybean-producing regions. While this uptick aligns with recent market fluctuations in agricultural commodities, it’s likely unfavourable for trend followers who have maintained a bearish stance on soybean oil due to its longer-term downtrend.

The attached chart shows a history of sharp price rises and falls, with soybean oil experiencing a significant rally in previous years, only to enter a prolonged decline. This week’s rally may disrupt established bearish positions among trend followers, who may find this environment challenging due to the commodity’s recent unpredictability and the ongoing demand fluctuations for biofuels​.

For trend followers, the recent bounce could be a temporary disruption in an otherwise bearish trend. However, given the potential for sudden moves influenced by external factors like biofuel policy changes or crop yields, cautious position management remains crucial in this volatile environment.

What’s Moving Down

• Cocoa: -8.78%

Cocoa futures declined by 8.78% this week, continuing a pattern of heightened volatility since reaching historically high levels in April 2024. This significant drop reflects the ongoing instability in the cocoa market, which has been marked by extreme price swings in both directions. The initial rally was driven by severe supply shortages due to adverse weather and disease in key producing regions like West Africa. However, since peaking, the market has experienced sharp corrections as supply conditions have somewhat stabilized, with periodic favourable weather forecasts supporting better crop yields​.

This week’s bearish movement could indicate a potential shift in the medium-term outlook for cocoa, as stabilizing conditions might alleviate some supply pressure. For trend followers, cocoa's recent fluctuations have posed challenges, with rapid reversals making it difficult to maintain consistent positions. This latest downward move could signal a trend shift, but given cocoa’s high volatility, careful monitoring and cautious position sizing are essential to navigate potential further price swings in the coming months.

• Coffee: -3.73%

Coffee prices fell by 3.73% this week, marking a setback for trend followers who had been riding a bullish trend in recent months. This price drop could be attributed to improved weather conditions in key coffee-producing regions, such as Brazil, which has experienced more favourable rainfall, helping to alleviate concerns over crop yields. The potential for a stable or even strong harvest season has relieved some supply pressure, pushing prices lower temporarily​.

For trend followers, this decline may disrupt recent bullish positions. The chart reflects a robust upward trend over the past year, driven by earlier concerns about supply constraints. However, with recent favourable weather conditions, the coffee market may experience more volatility, presenting potential reversals or pauses in the established trend. Given the highly weather-dependent nature of coffee, trend followers should monitor climatic developments closely, as any adverse conditions could quickly reignite bullish momentum in the medium term.

• Russell 2000: -3.16%

The Russell 2000 index dropped by 3.16% this week, which would likely be unfavourable for trend followers who may have taken bullish positions following recent upward momentum. Small-cap stocks, represented by the Russell 2000, are particularly sensitive to shifts in economic sentiment and interest rate expectations, both of which have been volatile recently. Concerns over prolonged interest rate hikes by the Federal Reserve, along with mixed economic data, have pressured equities broadly, with small-cap stocks facing added scrutiny due to their exposure to domestic economic conditions.

For trend followers, this decline interrupts what had appeared to be a potential breakout in the Russell 2000, as indicated by the recent price action on the attached chart. The reversal suggests caution, as the small-cap sector may continue to experience headwinds if economic uncertainties persist. Trend followers will need to manage risk carefully, as further volatility or negative economic signals could hinder a sustained upward trend in this index.

• Soybean Meal: -3.04%

Soybean Meal declined by 3.04% this week, aligning favourably for trend followers who are likely holding short positions. The ongoing downtrend reflects ample global soybean supplies and a relatively stable production outlook, reducing upward price pressures. In addition, improved crop conditions in key producing regions, such as the United States and South America, have contributed to a bearish sentiment in the soybean complex, with soybean meal prices tracking downward alongside.

For trend followers, the attached chart shows a consistent pattern of lower highs and lower lows, suggesting sustained bearish momentum. This trend may continue if favourable crop forecasts hold, allowing trend followers to potentially benefit from extended downside movement in the medium term. However, it will be essential to monitor weather conditions and demand factors, as any unexpected disruptions could introduce volatility to this ongoing trend.

• DJIA: -2.83%

The Dow Jones Industrial Average Futures (DJIA) fell by 2.83% this week, creating a challenging environment for trend followers who were likely bullish on this major index. This downward movement can be attributed to mixed economic signals and continued concerns over the Federal Reserve's interest rate policies. With lingering inflationary pressures and economic uncertainty, investors have exhibited caution, leading to a pullback in the DJIA as some sought safer assets amidst broader market volatility.

For trend followers, this decline disrupts what has been a generally bullish trend for the DJIA, as seen in the attached chart. This setback could signal caution in the near term, especially if economic conditions continue to create uncertainty. However, with the DJIA still near historic highs, trend followers may closely monitor upcoming economic data and Fed signals to determine whether this pullback is a temporary dip or the beginning of a broader shift in market sentiment.

Conclusion

This week has proven to be another challenging period for trend followers as markets grapple with heightened volatility and uncertainty. The TTU Trend Barometer's rise to a neutral 41 suggests a somewhat stabilizing environment, but the continued turbulence reflected in asset classes like equities, bonds, and the VIX underscores the fragile nature of current market trends. The SG Trend Index’s month-to-date and year-to-date declines highlight the difficulty in capturing consistent, profitable trends under these conditions.

Despite the hurdles, selective opportunities emerged in pockets such as energy, natural gas, and orange juice, which continue to benefit from sector-specific supply and demand dynamics. Conversely, equities and fixed income, particularly represented by indices like the Russell 2000 and DJIA, struggled against a backdrop of economic concerns and geopolitical instability, posing challenges for trend followers positioned for bullish momentum.

Looking ahead, the importance of disciplined risk management cannot be overstated. With mixed signals from global economic data and lingering geopolitical tensions, the path forward for trend-following strategies remains complex. Staying agile, carefully monitoring emerging market shifts, and maintaining flexible positions will be essential to navigating the volatility that has come to define today’s trading environment.

List of Resources used in the Week in Review

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