Trend Following - Week in Review - September 06, 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.

“Signs of Good Things to Come?.... But No Predictions”

This week, the markets have been turbulent, with rising volatility and equity weakness. The VIX, often called the "fear gauge," surged as equity markets experienced significant selloffs, driven by weak economic data and sector-specific downturns.

The S&P 500 dropped by about 4%, while the Nasdaq Composite saw a larger decline of over 5.6%. Technology stocks, especially those in the AI and semiconductor sectors, have been hit hard as the excitement surrounding AI fades. Disappointing outlooks from companies like Broadcom further exacerbated the sector’s underperformance.

Mixed economic data, including weaker-than-expected ISM manufacturing and private payrolls reports, fuelled concerns of a broader slowdown, increasing risk-off sentiment and pushing the VIX higher as investors sought protection. Additionally, energy markets struggled, with crude oil prices tumbling more than 8%.

Trend Barometer and SG Trend Index

This week, the Trend Barometer holds steady at 50, signalling neutral trending conditions, down from last week’s more active reading of 75. However, the SG Trend Index shows a month-to-date (MTD) gain of +0.29% as of September 5, with a year-to-date (YTD) performance of 1.37%.

While these signals are generally positive, they don’t push us into making predictions. Instead, they give us reason to be optimistic that favourable opportunities may arise for trend followers in the weeks ahead. The environment remains complex and uncertain, but after a few difficult months, there are hints that volatility may increase as we approach the US elections, potentially paving the way for a stronger finish to the quarter.

Periods of difficulty are often followed by phases of positive performance—similar to a breakout after a long period of congestion. But while it’s tempting to construct a narrative about what could happen next, our systems are not built to predict the future. Instead, they react to price data, ensuring that we never let a good story get in the way of the facts. Our edge remains in this ability to respond, not guess—and that’s what we rely on.

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

Here's how different asset classes moved this week:

• Volatility Index: +35.94%

The VIX surged this week, reflecting heightened market uncertainty. This spike was largely driven by concerns over weak economic data, including lower-than-expected ISM manufacturing and payroll reports, leading to increased risk aversion among investors.

• Grains: +0.13%

Grain prices saw minimal movement this week, with slight gains. Weather conditions remain a key factor, but no major developments have impacted prices significantly.

• Meats: -2.57%

Meat prices declined as demand softened. Supply chains remain stable, but consumer demand appears to have weakened, contributing to the price drop.

• Bonds: +1.23%

Bond markets posted a modest rise, as investors sought safer assets amid broader equity market volatility. This shift towards bonds reflects ongoing concerns over global economic stability.

• Energy: -4.58%

The energy sector, especially crude oil, experienced sharp declines. This drop was driven by concerns about slowing global demand and an increase in supply, especially from the U.S. and OPEC.

• Metals: -2.68%

Industrial metals fell as demand for manufacturing inputs weakened. Concerns over economic slowdowns in major markets like China added pressure on metal prices.

• Soft Commodities: -1.76%

Soft commodities dipped this week, following a period of bullish moves earlier in the year. The decline was largely driven by stabilizing supply conditions across several key markets.

• Equity Index: -5.43%

Equities faced a significant hit, with technology stocks driving the decline. A cooling of AI-related enthusiasm and weak sector earnings reports, particularly in semiconductors, played a major role in this week's losses.

• Currency: -0.01%

Currencies remained relatively flat this week. Central bank policies continue to influence this space, but there were no major shifts in the FX markets.

The movements across asset classes this week highlight a market grappling with uncertainty and shifting sentiment. Volatility surged, driven by weaker economic data and risk-off behaviour, while equities, particularly in the tech sector, faced sharp declines. Commodities showed mixed results, with grains remaining stable and energy experiencing significant losses due to demand concerns. Meanwhile, bond markets benefited from a flight to safety, and soft commodities took a breather after previous bullish runs. Overall, the diverse asset class performance reflects an environment of caution, where market participants are adjusting their positions in response to evolving conditions.

Top 10 Bear and Bull Price Moves

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

What’s Moving Up

• Volatility Index (VIX): +35.94%

This week, the Volatility Index (VIX) surged by 35.94%, reflecting heightened investor anxiety driven by weak economic data and sector-specific challenges. The VIX, often seen as a "fear gauge," measures expected market volatility and its rise indicates increasing concerns about the stability of the U.S. economy. Disappointing ISM manufacturing and private payrolls reports added to fears of a broader economic slowdown, prompting a flight to safer assets.

The technology sector, particularly AI and semiconductors, saw sharp declines, with companies like Broadcom issuing weaker-than-expected outlooks. The waning enthusiasm for AI, combined with the tech sell-off, intensified market volatility. Global factors, such as China’s economic struggles and property crisis, further exacerbated concerns, particularly as China’s slowdown impacts global demand for key sectors like commodities and technology.

Additionally, investor uncertainty over the Federal Reserve’s next moves on interest rates amid recession fears contributed to the VIX’s rise. As a result, demand for hedging instruments like options increased, pushing volatility higher. The combination of economic data, sector challenges, and global risks suggests that market turbulence could persist as investors brace for potential further declines.

• Natural Gas: +7.62%

Natural gas prices surged by 7.62% this week, primarily due to increased demand and concerns over potential supply shortages. Factors such as disruptions in liquefied natural gas (LNG) exports, geopolitical tensions in key energy-producing regions, and Europe’s preparations for winter contributed to this sharp rise. The combination of these supply-side pressures has led to heightened market volatility, pushing prices upward.

Despite this bullish move, trend followers are unlikely to have participated in the rally, as natural gas has been in a period of mean reversion since February 2023. This prolonged congestion has created choppy, non-directional price movements, which trend-following strategies typically avoid. As the market remains range-bound, trend followers are waiting for a clear breakout or sustained trend to signal future opportunities.

• Orange Juice: +4.98%

Orange juice prices climbed another 4.98% this week, driven by ongoing supply chain disruptions and heightened demand. The market continues to feel the effects of supply shortages, exacerbated by poor harvests and logistical challenges, particularly in key producing regions like Florida and Brazil.

For trend followers, orange juice has been a highly favoured market since April 2022, offering significant profits for medium- to long-term strategies. Its sustained upward momentum has made it a standout outlier, providing consistent returns as prices soared over the past year. This massive outlier shows no sign of reversing, and as long as supply constraints persist, trend followers who include orange juice in their universe will likely continue benefiting from this exceptional rally.

• Oats: +3.77%

Oats posted a 3.77% gain this week, driven by improving demand and concerns over weather conditions impacting crop yields in key growing regions. Unfavourable weather patterns, particularly in North America, have led to reduced harvest expectations, contributing to the recent price surge.

However, this move goes against the broader bearish trend that has been in place since August 2023. For medium- to long-term trend followers, this sudden reversal is likely unfavourable, as it disrupts the downward momentum many have been capitalizing on. This spike may be signalling the potential end of the bearish trend, but for now, it represents a challenging environment for those positioned short in the market.

Soybean Meal: +3.35%

Soybean meal prices rose by 3.35% this week, supported by strong demand from livestock feed producers and concerns over potential supply disruptions due to adverse weather conditions in key growing regions, particularly in South America. The increase in demand, coupled with tightening supplies, has contributed to the recent bullish momentum across agricultural markets.

However, this upward move is likely unfavourable for trend followers who have been trading the bearish trend since the peak in February 2023. Many traders have profited from the prolonged downtrend in soybean meal prices, but this recent spike could signal the end of that bearish cycle. If demand continues to strengthen and supply concerns persist, this move may be the beginning of a trend reversal, presenting challenges for those positioned short in the market.

What’s Moving Down

• Nikkei 225: -9.68%

The Nikkei 225 plunged by 9.68% this week, marking one of its steepest declines in recent months. This sharp drop can be attributed to growing concerns over global economic conditions, particularly related to China’s economic slowdown, and the potential impact on Japan’s export-driven economy. As China struggles with its property crisis and weakening industrial output, Japan’s reliance on Chinese demand for its goods has raised fears of declining trade. Additionally, global monetary tightening by major central banks, including the U.S. Federal Reserve, has increased market volatility, further weighing on investor sentiment in Japan. The weak yen, which had previously been seen as a supportive factor for Japanese exporters, is now adding to inflationary pressures domestically, contributing to the bearish outlook for the Japanese market.

For trend followers, this dramatic downturn may present a positive opportunity to capitalize on an emerging bearish trend. After enjoying a prosperous bullish trend in the Nikkei 225 that climaxed in July 2024, many traders are now watching for signs of a sustained reversal. With the Nikkei’s decline signalling a potential shift in market sentiment, trend followers who were previously positioned long in the market may see this as the perfect moment to jump aboard the developing downtrend. The break from the extended bullish trend could offer new opportunities for those looking to capture profits in the downward movement, provided the trend solidifies in the weeks to come.

• Gasoline RBOB: -9.22%

Gasoline prices fell sharply by 9.22% this week, reflecting a broader decline in the energy sector driven by a combination of weak demand and oversupply. The drop in gasoline prices can be linked to seasonal factors, with demand for gasoline typically waning after the summer driving season. Additionally, global economic uncertainties, particularly slowing growth in major economies like China and Europe, have dampened demand for crude oil and refined products, including gasoline. On the supply side, increased production from U.S. refineries, combined with a relatively stable supply from OPEC members, has led to a surplus in gasoline stocks, further pressuring prices.

For trend followers, this sharp decline is likely a welcomed continuation of the bearish trend that began after gasoline prices peaked in April 2024. Many trend-following strategies have likely benefited from this sustained downward movement, as gasoline prices have steadily fallen over the past several months. The current oversupply and weakening global demand provide strong signals for trend followers to remain engaged in this bearish trend. With gasoline inventories still elevated and demand showing little sign of recovery, trend followers may continue to see opportunities for profit as the market remains under pressure.

• Canola: -7.35%

Canola prices saw a significant decline of 7.35% this week, driven by favourable weather conditions in key growing regions, which improved the outlook for crop yields. With optimal growing conditions in Canada and Europe, two of the largest canola producers, the market has seen an increase in supply expectations, putting downward pressure on prices. Additionally, a decrease in demand for canola oil, used in both food production and biofuels, has contributed to the recent price drop.

For trend followers, this price decline is likely viewed as a positive development. Many trend-following strategies have been short on canola since its peak in May 2022, when prices reached historic highs. The sustained bearish trend over the past year has provided profitable opportunities for traders, and this week’s move further solidifies the downward trajectory. As long as weather conditions remain favourable and demand pressures persist, trend followers are likely to continue benefiting from this extended bearish trend.

• Crude Oil WTI: -7.33%

Crude oil prices dropped by 7.33% this week, driven by growing concerns over weakening demand as global economic growth slows. Key factors include reduced industrial activity in major economies like China and Europe, along with a softening in U.S. demand. These factors, combined with relatively stable supply levels from OPEC+ producers, have put significant downward pressure on the oil market.

For trend followers, this sharp decline is likely an exciting opportunity. After a prolonged period of consolidation in the crude oil market since March 2023, this breakdown to the short side may signal the start of a sustained bearish trend. Many traders who have been waiting for a clearer signal now have the chance to capitalize on this move, and we could be in for a nice, extended short ride as demand concerns continue to weigh on prices. With global economic uncertainty showing little sign of easing, trend followers are likely to remain active in this bearish phase.

• Crude Oil Brent: -7.10%

Brent crude oil prices fell by 7.10% this week, closely mirroring the decline in WTI crude. The drop was driven by similar concerns over oversupply and weakening global demand, particularly as economic slowdowns in major markets like China and Europe reduce industrial activity and energy consumption. With OPEC+ maintaining steady output levels, the oversupply situation has further exacerbated the downward pressure on Brent prices.

Like its correlated counterpart, WTI crude, Brent is experiencing a favourable bearish breakdown. This extended move to the downside is likely benefiting trend followers who have positioned themselves short after a prolonged period of consolidation. The strength of this bearish trend offers trend followers the opportunity to ride the decline, as global economic uncertainties and supply-demand imbalances continue to weigh on Brent crude prices.

Conclusion

This week in the futures markets has been marked by significant volatility and shifting trends across multiple asset classes. The sharp rise in the VIX underscores the prevailing uncertainty as investors grapple with weakening economic indicators and sector-specific challenges, particularly within the technology and energy sectors. Equity indices like the S&P 500 and Nasdaq faced substantial declines, while commodities exhibited a mixed performance with notable drops in energy and metals contrasting with gains in specific agricultural products. These movements reflect a market environment characterized by cautious sentiment and heightened risk aversion, driven by global economic slowdowns and geopolitical tensions.

For trend followers, the current landscape presents both challenges and opportunities. While certain assets like Fixed Income and Grains continue to offer lucrative trends, others such as crude oil and gasoline are reinforcing bearish patterns that trend-following strategies are starting to be positioned for. The ongoing bearish breakdowns in key markets like the Nikkei 225 and Brent Crude indicate potential shifts in long-term trends, suggesting that trend followers should remain vigilant and adaptable. As we approach pivotal events like the US elections, the market is poised for further volatility, potentially setting the stage for new trend developments. Staying informed and responsive to these dynamic conditions will be essential for navigating the complexities of the futures markets and capitalizing on emerging trends in the weeks ahead.

List of Resources used in the Week in Review

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