Trend Following - Week in Review - September 20, 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.

“Moderate Movement as Sugar Surges, Bonds Weaken”

This week saw moderate but notable changes across most asset classes, with sugar surging by +16.99% and Canola up by +8.58%, while the bonds and grains sectors took a hit. The SG Trend Index reported a favourable trend for followers, gaining +1.51% as of September 19, 2024, improving from last week’s +0.96%. This positive performance continues to reflect strengthening conditions for trend-followers.

The TTU Trend Barometer, on the other hand, has slipped slightly, reading 39 compared to last week's 50, signalling a moderately weak environment for trend. The slight drop in the barometer, alongside the positive SG Trend Index, highlights a balanced but cautious environment for trend-followers.

Trend Barometer and SG Trend Index

Trend Barometer: The barometer now sits at 39, down from 50 last week. This indicates a deteriorating trending condition, with a slight weakening in overall trend strength, evidenced by the falling 10-day rate-of-change. Although this suggests less robust trend-following conditions compared to last week, the steady performance of key assets shows trend-following strategies can still find profitable opportunities.

SG Trend Index: The SG Trend Index shows a strong month-to-date gain of +1.51% as of September 19, compared to +0.96% the previous week. This brings the year-to-date performance to +2.82%, continuing the upward trajectory seen in recent weeks. The improving SG Trend Index points to favorable conditions for trend-followers, despite the neutral Trend Barometer.

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: +0.83%
  The VIX futures saw a slight increase, signalling a marginal rise in market volatility, likely driven by ongoing uncertainty surrounding interest rates and economic data.
• Grains: +0.08%
  Grain prices edged up slightly, with a near-flat performance. This stability reflects balanced supply and demand dynamics, though upcoming weather patterns could influence future movements.
• Meats: +3.31%
  The meat sector showed strong gains this week, supported by robust global demand and supply chain adjustments.
• Bonds: -0.59%
  Bonds declined by -0.59%, as rising interest rate expectations put pressure on fixed-income assets. This downtrend signals cautious investor sentiment, despite recent market calm.
• Energy: +4.15%
  Energy prices rose sharply, driven by solid demand and tighter supply conditions, particularly in crude oil markets.
• Metals: +1.46%
  Metals posted modest gains, with industrial demand supporting prices across the sector.
• Soft Commodities: +4.00%
  Soft commodities surged, led by sugar, which saw an impressive +16.99% gain. The strong performance reflects tight supply and increasing global demand.
• Equity Index: +1.66%
  Equities saw a moderate recovery, with the tech-heavy Nasdaq continuing to outperform amid positive investor sentiment.
• Currency: +0.28%
  Currencies moved only slightly, with central bank policies remaining the key influence on foreign exchange markets.

This week’s market movements reflect a diverse and dynamic market environment. While volatility ticked up slightly, driven by economic uncertainties, key sectors such as energy, soft commodities, and meats experienced robust gains, particularly with sugar and oil leading the charge. On the other hand, bonds struggled under the weight of rising interest rate expectations, and grains remained largely flat, impacted by stable supply and demand dynamics. Equities posted a moderate recovery, buoyed by tech sector strength, while currencies saw minimal movement. Overall, the week presented a balanced mix of opportunities and challenges for trend-followers, as sectors continued to adjust to evolving global 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

• Sugar: +16.99%

Sugar's rally this week marks a fast uptrend that started in August 2024. The market has been driven by reduced supply due to adverse weather conditions in key production regions such as Brazil and Thailand. These supply constraints have combined with rising demand, particularly from the biofuel sectors, to create the perfect conditions for a strong breakout.

For trend followers, this fast upward momentum might present an opportunity for some bullish breakouts with shorter-term models. However, it could also represent material losses for those still holding onto the previous bearish trend. Managing positions during rapid reversals like this can be challenging for systematic traders, especially those relying on longer-term models.

• Canola: +8.58%

Canola’s rise is another significant mover, with this week’s price spike linked to reduced yields in Canada due to adverse weather. For trend followers, canola has been in a prolonged bearish trend since peaking in mid-2022. This latest price jump has likely caught the attention of traders, as it could indicate the end of the bearish cycle and the beginning of a new upward trend. Many systematic traders will be closely watching for confirmation signals that this rally is more than just a short-term correction (Barchart.com).

• Natural Gas: +6.55%

Natural gas prices surged by 6.55% this week, driven primarily by colder weather patterns across the Northern Hemisphere, which boosted demand for heating fuel. However, despite this sharp rally, it is unlikely that trend followers are significantly participating in this move. Since early 2023, natural gas has been stuck in a sustained congestion pattern, characterized by sideways price action and a lack of clear direction. While the current price surge aligns with broader upward moves in the energy sector, systematic traders who rely on longer-term trends are likely to remain cautious.

This congestion phase has limited trend-following opportunities in the market, as traders wait for a more defined breakout. Without signs of a sustained directional shift, natural gas remains unattractive for medium to long-term trend-following strategies, as the recent rally may simply be part of the ongoing volatile but non-trending price behaviour​(Barchart.com)​(Barchart.com).

• Soybean Oil: +6.44%

Soybean oil prices surged by 6.44% this week, breaking from the sustained downtrend that began in August 2023. The sharp rise was primarily driven by increased demand in the biodiesel sector and tighter global supplies. Despite this week’s strong upward move, trend followers who have been bearish since the market’s peak last year are likely still cautious, as there is no clear sign that this rally signals a reversal of the longer-term bearish trend​(Barchart.com)​(Barchart.com).

Soybean oil’s sustained downtrend over the past year has been fuelled by rising production levels from key South American producers and weakening global demand, particularly for biodiesel. For medium to long-term trend followers, the recent price increase could be seen as a temporary correction rather than a definitive end to the bearish phase. Until there is confirmation of a sustained breakout from this pattern, many traders may remain on the sidelines or maintain short positions, waiting for stronger indications that the broader trend has shifted​(Investopedia)​(Barchart.com).

The market continues to grapple with ample supply, which may limit the longevity of this price surge unless demand picks up significantly or production constraints arise.

Gasoline RBOB: +6.03%

Gasoline RBOB prices surged by 6.03% this week, largely driven by several factors affecting the energy markets. Key contributors to this rise include tightening global supplies, especially in the U.S., where recent inventory reports indicated lower-than-expected stockpiles. This has created a bullish environment for gasoline, despite ongoing concerns over demand in major markets like China, which has kept overall energy markets volatile. Additionally, geopolitical issues, such as supply disruptions from Libya and a delay in OPEC+ adding supply, have further tightened the market, pushing prices higher.

Despite this upward movement, Gasoline RBOB has experienced a sharp sell-off since April 2024, as demand concerns have weighed on the market for months. This week’s price rise may be seen as a short-term correction, especially in the context of broader energy market dynamics, and there are no clear signs yet that the bearish trend has ended. For trend followers, this type of market volatility presents challenges, as longer-term trends remain uncertain, and systematic traders are likely waiting for stronger signals of a sustained directional move before committing to new positions.

Overall, while this week's rally in gasoline prices has captured attention, traders remain cautious about whether this signals a lasting shift in market dynamics or a temporary fluctuation before prices resume their downward trend.

What’s Moving Down

• Wheat: -4.25%

Wheat prices fell by 4.25% this week, continuing a sustained bearish trend that has been in place since May 2022. This decline is largely driven by favourable weather conditions in major wheat-producing regions such as the U.S., Russia, and Ukraine, which have resulted in better-than-expected harvests and increased global supply. The resolution of some geopolitical tensions related to wheat exports from Ukraine, combined with robust harvest forecasts in Russia, has further pressured prices lower​(Morpher)​(Barchart.com).

Additionally, as global wheat inventories remain relatively high and demand has not increased significantly, there has been little in the way of fundamental support for prices. The market remains oversupplied, and with no major disruptions expected in the near term, it appears that the bearish trend is likely to continue. For medium to long-term trend followers, this price move is in line with expectations, and there are no clear signs that the bearish phase for wheat is coming to an end​(Morpher)​(Barchart.com).

This ongoing decline reflects the broader challenges facing the agricultural sector, where excess supply and stable demand have kept downward pressure on prices. As a result, traders focused on trend-following strategies are likely maintaining short positions, capitalizing on the prolonged price weakness.

• Oats: -3.05%

Oats saw a 3.05% decline this week, driven by a combination of improved weather conditions and stronger-than-expected harvests in key growing regions like Canada and the U.S. These factors contributed to an increase in supply, adding downward pressure to an already bearish market. This bearish move aligns with the overall downtrend that has persisted since April 2022, driven by favourable crop conditions and high global inventories​(Morpher).

However, despite the long-term downward trend, the oats market has been particularly volatile, making it difficult for trend followers to capture consistent profits. Frequent price fluctuations, influenced by unpredictable weather and varying supply dynamics, have caused the bearish trend to exhibit significant choppiness. This type of volatility complicates medium to long-term trading strategies that rely on clear, sustained price movements​(Morpher)​(Barchart.com).

While the overall trend remains bearish, this week's decline is just another move in a volatile market that remains challenging for systematic traders to exploit effectively. Until there is greater stability or clearer signals of market direction, this volatility is likely to continue posing challenges for trend followers.

• Corn: -2.84%

Corn prices declined by 2.84% this week, continuing the sustained downtrend that has been in place since April 2022. This decline can be attributed to a combination of favourable growing conditions in key corn-producing regions, including the U.S., where harvest forecasts remain robust. The USDA’s most recent reports project higher corn yields despite some reductions in beginning stocks. This continued strength in supply is driving prices lower​(AgWeb)​(USDA ERS).

Additionally, weaker export demand has contributed to downward pressure on prices, with U.S. corn exports lagging behind previous years. The ongoing abundance of supply, combined with less-than-stellar demand, has allowed the bearish trend to continue. This market move offers further profitable opportunities for trend followers, who have capitalized on the extended price decline since the 2022 peak​(USDA ERS).

Overall, this week's price drop is viewed as a continuation of the long-standing bearish trend, with no clear signs of a reversal. As supplies remain high and demand struggles to pick up, traders are likely to continue benefiting from this downward trajectory.

• Coffee: -2.72%

Coffee prices declined by 2.72% this week, primarily due to an increase in global supply. Reports indicated that global coffee exports have been rising, with significant contributions from Brazil, the world’s largest coffee producer. Brazil's coffee exports saw a sharp year-over-year increase of around 41%, contributing to the downward pressure on prices. Additionally, Vietnam, another major producer, also reported higher-than-expected coffee exports​(Nasdaq)​(Nasdaq).

While this week's decline contrasts with the strong bullish trend that coffee has experienced since October 2023, it does not necessarily signal the end of this trend. The broader outlook for coffee remains positive due to factors like reduced crop yields in Vietnam and ongoing drought conditions in key coffee-growing regions, such as Brazil’s Minas Gerais. These supply constraints have underpinned the longer-term upward momentum in coffee prices​(Nasdaq).

For trend followers, this week’s dip may represent a temporary correction within a broader bullish cycle, as supply and demand factors remain largely supportive of higher coffee prices in the long term.

• Platinum: -2.65%

Platinum prices declined by 2.65% this week, driven by a reassessment of demand outlooks and broader macroeconomic factors. Investors are increasingly concerned about a slowdown in industrial demand, particularly from the automotive sector, which is a major consumer of platinum for catalytic converters. Additionally, a stronger U.S. dollar has added further downward pressure on dollar-denominated commodities like platinum, making it more expensive for foreign buyers​(Markets)​(MINING.COM).

For trend followers, it is unlikely that they would have actively participated in this price move. Platinum has been in a sustained congestion phase since September 2022, marked by a lack of clear directional movement. This choppy price action has made it difficult for systematic traders to capitalize on any meaningful trends. Until platinum breaks out of this long-standing range, trend followers are likely to remain cautious, waiting for stronger market signals​(MINING.COM).

Conclusion

This week’s trends presented a mixed landscape for trend-following strategies. The bullish surges in sugar, canola, and energy markets offered strong opportunities for systematic traders to capitalize on well-defined upward moves. However, sugar's ongoing rally also demonstrated the complexity of fast-moving markets. While shorter-term models could benefit from the bullish breakout, traders still holding onto the previous bearish trend may have faced material losses—highlighting the challenges of navigating rapid market reversals.

Meanwhile, bearish movements in markets like wheat, oats, and corn continued to follow long-standing downtrends, offering profitable short positions for those leveraging persistent supply pressures and weak demand. On the flip side, the volatility in natural gas and platinum, which remain in congestion phases, illustrates the difficulty for trend-followers in identifying clear, sustained trends within these markets.

As global conditions continue to shift, it’s clear that both opportunities and risks remain prominent across the futures markets. Traders need to stay vigilant, balancing caution in congested markets with decisive action in those presenting clearer trends. Whether it's riding the ongoing strength in energy or maintaining short positions in agricultural sectors, adaptability is key to navigating the dynamic nature of the markets. Stay tuned for next week’s insights as we continue exploring the evolving landscape of trend-following strategies.

List of Resources used in the Week in Review

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