Trend Following - Week in Review - September 27, 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.

“Natural Gas Ignites While Palladium Cools”

This week saw strong upward movement in natural gas and cocoa, while palladium and energy markets struggled. The SG Trend Index reported a positive month-to-date (MTD) gain of +1.96% as of September 26, 2024, bringing the year-to-date (YTD) performance to +3.27%. This marks an improvement from last week’s MTD result of +1.51%. Trend followers are benefiting from these improving market conditions.

The TTU Trend Barometer has climbed to 55, up significantly from last week’s reading of 39, signalling a positive trending environment. This increase, along with the positive SG Trend Index, indicates favourable conditions for trend-followers.

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 was marked by a surge in volatility, with the VIX futures climbing 7.50%, reflecting increased uncertainty over interest rates and geopolitical concerns. Grains also saw solid gains (+3.27%) as tightening supplies continued to support prices, while soft commodities like cocoa and soybean meal experienced notable increases due to supply constraints and heightened demand.

Meanwhile, the energy sector remained mostly flat, with a slight decline in crude oil prices driven by demand concerns, especially from China, and increasing inventories in the U.S. The metals market was mixed, with palladium experiencing a sharp -5.76% decline as demand from the automotive sector weakened.

Bonds and energy experienced minor declines, signalling investor caution amid rising interest rate expectations and softer demand for crude.

Here's how different asset classes moved this week:

• Volatility Index: +7.50%
  The VIX futures surged this week, reflecting heightened market volatility. Concerns over interest rates and geopolitical tensions continue to drive uncertainty.
• Grains: +3.27%
  Grain prices saw solid gains, supported by tightening global supplies and strong demand in key markets.
• Meats: +0.46%
  Meats showed modest growth, with stable demand keeping the market balanced.
• Bonds: -0.15%
  Bonds edged down slightly as rising interest rate expectations put pressure on fixed-income assets.
• Energy: -0.06%
  Energy prices were mostly flat, with minor declines driven by ongoing concerns over global demand, particularly in crude oil.
• Metals: +0.95%
  Metals posted slight gains, reflecting industrial demand, though palladium saw notable weakness.
• Soft Commodities: +2.47%
  Soft commodities rose, led by strong gains in cocoa and soybean meal, driven by tightening global supplies.
• Equity Index: +0.99%
  Equities saw moderate gains, with tech stocks continuing to support the broader market.
• Currency: +0.68%
  Currency markets were relatively stable, with central bank policy shifts continuing to dominate investor sentiment.

Overall, this week presented a complex mix of opportunities and challenges for trend-followers, with energy and volatility leading the way in providing potential trading opportunities, while caution prevailed in bonds and select commodities. The key takeaway is that while certain sectors like grains and volatility showed strong trends, traders should remain vigilant in navigating these ever-changing market 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

• Natural Gas: +9.20%

Natural gas surged by 9.20% this week, primarily driven by an early onset of colder-than-expected weather across key regions in the Northern Hemisphere. This increase in heating demand, alongside tighter-than-expected supply conditions, particularly in Europe, pushed prices higher. In the U.S., storage levels were also reported lower than anticipated for this time of year, adding further pressure on supply and contributing to the bullish move. Moreover, concerns over potential supply disruptions from key exporting countries like Russia and geopolitical tensions in the Middle East have stoked fears of a future supply crunch.

From a trend-following perspective, despite this strong up-move, natural gas has been trapped in a congestion pattern since early 2023. This extended sideways movement has made it difficult for systematic traders to capture consistent profits, as there has been no clear breakout. However, with this recent price surge, traders might now be eyeing a potential long-side breakout. Should the price continue to rise and break past key resistance levels, trend-followers could see this as a signal to enter long positions, betting on continued upward momentum.

At the moment, the market is poised for a potential shift, and systematic traders will likely be watching closely for confirmation of sustained upside movement. A clear breakout could signal the end of the congestion phase, providing new opportunities for medium- to long-term trend-followers.

• Cocoa: +8.37%

Cocoa surged by 8.37% this week, driven largely by tight global supplies and continued strong demand. The ongoing supply constraints stem primarily from adverse weather conditions in West Africa, particularly in Côte d'Ivoire and Ghana, the world’s two largest cocoa producers. Unfavourable growing conditions, such as droughts and poor rainfall, have impacted crop yields, reducing the availability of cocoa beans for global export. Additionally, logistical issues and political instability in some producing regions have exacerbated the supply crunch.

Demand for cocoa, particularly from the confectionery industry, has remained robust, further supporting prices. The surge in demand from Europe and North America for chocolate products has added upward pressure on prices, particularly as we head into peak seasonal demand periods.

From a trend-following perspective, cocoa is showing signs of another bullish breakout. Prices are moving back towards their previous highs from April 2024, when the market reached its highest point of the year. This rally could be an early signal for traders to consider long-side breakouts as the commodity climbs back toward those previous levels. For systematic traders, this type of price action—approaching a key resistance level—often presents an attractive opportunity to position for a potential upside breakout.

If cocoa continues to break past resistance and holds above these levels, we could see further confirmation of a longer-term bullish trend. Early entries into this market by trend-followers could offer strong profit potential, particularly if global supply issues persist and demand remains elevated.

• Soybean Meal: +7.83%

Soybean meal prices rose by 7.83% this week, fuelled by tightening global supplies and increasing demand in the livestock feed sector. One of the key drivers behind this surge has been adverse weather conditions in major soybean-producing regions, particularly in South America. Argentina, one of the world’s largest exporters of soybean products, has faced significant production challenges due to prolonged drought conditions. This has reduced the global supply of soybeans and, consequently, soybean meal, creating upward pressure on prices.

In addition to supply issues, demand for soybean meal has remained robust, particularly from the livestock industry, where soybean meal is a critical component of animal feed. The rising demand for meat production globally, especially in regions like China and Southeast Asia, has further bolstered the need for this commodity. This combination of shrinking supply and rising demand has contributed to the bullish momentum we are now witnessing.

From a trend-following perspective, soybean meal has been in a prolonged bearish trend since early 2023. However, this week’s sharp price rise is testing the resilience of that downtrend. For long-term trend followers, this rally may seem unfavourable, as it goes against the established downward momentum. However, for shorter-term trend followers, this price movement may signal the potential for a bullish breakout. If prices continue to push higher and break through key resistance levels, it could mark the beginning of a new upward trend, creating opportunities for systematic traders to enter long positions.

The current situation may offer a key inflection point for trend-followers: while long-term strategies may still favour the bearish outlook, shorter-term models are likely preparing for the possibility of a breakout. Traders will be closely watching for confirmation signals that this rally is more than a temporary correction, and if sustained, could shift the market back into a bullish phase.

• VIX Futures: +7.50%

Volatility, as measured by the VIX, surged by 7.50% this week, signalling growing uncertainty across global markets. The VIX, often referred to as the "fear gauge," reflects expectations of near-term volatility in equity markets, particularly in the S&P 500. This recent increase is largely driven by a combination of factors, including renewed concerns over central bank policy, rising interest rates, and lingering geopolitical tensions.

One of the key drivers behind this volatility is the ongoing uncertainty surrounding the Federal Reserve's next moves on interest rates. With inflation still above target in many regions and economic data offering mixed signals, markets remain on edge, unsure whether the Fed will maintain its tightening stance or pivot to a more dovish approach. This uncertainty has led to more cautious positioning from investors, as they anticipate potential shocks in equity and bond markets.

Geopolitical risks, including tensions in the Middle East and ongoing conflicts in Eastern Europe, have also contributed to the rise in volatility. Investors are increasingly concerned about how these global flashpoints could disrupt energy supplies and broader economic stability. The risk of escalation in these regions has injected additional fear into the markets, driving volatility higher.

For trend-followers, the recent expansion in volatility presents both opportunities and challenges. The VIX tends to exhibit strong momentum during periods of market stress, making it an attractive vehicle for volatility-focused trend-following strategies. However, the challenge lies in the unpredictable nature of volatility spikes, which can be short-lived and lead to sharp reversals. Traders operating on shorter timeframes may be able to capitalize on this increase in volatility, while longer-term trend-followers may approach with caution, as volatility can ebb just as quickly as it rises.

Given the current market backdrop, systematic traders will be monitoring volatility closely, looking for confirmation of whether this spike signals a sustained period of market stress or simply a temporary reaction to recent economic data and geopolitical developments. If volatility continues to rise, it could present further opportunities for volatility-based strategies.

Coffee: +5.68%

Coffee prices surged by 5.68% this week, continuing the strong upward momentum that has been in place since October 2023. This sustained uptrend is largely driven by supply shortages from key producing countries like Brazil and Vietnam. Brazil, the world's largest coffee producer, has faced unfavourable weather conditions, including droughts and frosts, which have reduced coffee yields over the past year. Similarly, Vietnam, another major exporter, has reported lower-than-expected crop sizes due to unpredictable weather patterns and logistical issues. These supply constraints have supported the bullish trend in coffee prices.

In addition to weather-related issues, strong demand for coffee, particularly from Europe and North America, has helped to sustain this uptrend. Consumer demand for coffee remains robust, and any further disruptions in supply are likely to exacerbate the upward pressure on prices. As a result, the combination of constrained supply and solid demand has continued to drive coffee higher.

From a trend-following perspective, this week's price rise would have been greeted positively by traders who have been capitalizing on the sustained uptrend since late 2023. Coffee’s long-term bullish momentum has provided trend followers with consistent opportunities to ride the trend, as the commodity continues to push higher. Traders positioned long in the market are benefiting from these conditions, as there are few signs that the fundamental supply constraints will ease in the near future.

Given the strength of this trend, systematic traders are likely holding long positions and may even consider adding to them as the market continues to demonstrate bullish behaviour. With the global supply-demand imbalance showing no signs of immediate resolution, trend-followers will likely remain engaged in this market, looking to capture further upside.

What’s Moving Down

• Palladium: -5.76%

Palladium saw a sharp decline of 5.76% this week, continuing the bearish trend that has been in place since March 2022. This downturn is largely driven by weakening demand from the automotive sector, which is the largest consumer of palladium for catalytic converters. As global car production has slowed, particularly in Europe and Asia, the demand for palladium has waned. The rise in electric vehicles, which do not use palladium, has also contributed to the declining demand for the metal. Additionally, a stronger U.S. dollar has put further downward pressure on dollar-denominated commodities like palladium, making it more expensive for foreign buyers.

From a supply perspective, the easing of earlier supply constraints from Russia, a key palladium producer, has also played a role in this week's decline. With supply more stable and demand declining, palladium prices have struggled to find upward momentum. This week's price drop continues the broader downtrend in the market.

For long-term trend-followers, this week's decline would likely have been a welcome continuation of the established bearish trend. Since March 2022, palladium has been steadily losing value, and traders who have been positioned short in this market have likely benefited from the sustained downtrend. However, it’s important to note that in recent months, palladium has entered a congestion pattern, with prices moving sideways rather than in a clear downward trend. This lack of direction has made the market less attractive for short- to medium-term trend-followers, who may prefer more pronounced trends to capitalize on.

While long-term systematic traders may still be holding short positions, short- to medium-term trend-followers are less likely to have engaged with palladium in recent months, given the lack of clear directional movement. The congestion pattern, combined with the overall weakness in industrial demand, may keep this market in a prolonged state of low activity until clearer trends emerge.

• Orange Juice: -4.00%

Orange juice prices dropped by 4.00% this week, a move that would have been unfavourable for trend-followers who have been bullish on this market since early 2022.

The sharp decline comes after a prolonged rally driven by a combination of weather-related disruptions and supply chain constraints. Earlier in the year, orange juice saw significant price increases due to crop damage caused by hurricanes and droughts in key production areas like Florida and Brazil. These supply shocks helped drive a sustained upward trend, making orange juice one of the top-performing commodities for trend-following portfolios.

However, this week’s price drop can be attributed to improving weather conditions and a recovery in supply from major growing regions. Reports from Brazil, in particular, indicate that favourable weather has led to stronger-than-expected harvests, easing some of the previous supply concerns. Additionally, the market has seen a stabilization in production levels after the initial shocks of the past year, which has tempered the bullish momentum in recent weeks.

For trend-followers, this week’s decline likely resulted in some portfolio losses, particularly for those holding long positions in orange juice. Given that orange juice has been a major contributor to trend-following performance over the past year, this pullback may have come as a surprise, highlighting the inherent risks in commodity markets.

While the overall long-term trend remains intact, this week’s reversal shows how quickly market dynamics can shift, even in strongly trending markets.

The key question for trend-followers now is whether this move represents a short-term correction within the broader bullish trend or the beginning of a more prolonged reversal. Traders will be watching closely to see if prices stabilize or continue to decline, as further downside could challenge the long-standing uptrend in this market.

• Gasoline RBOB: -3.87%

Gasoline RBOB prices declined by 3.87% this week, continuing the downtrend that has been in place since late August 2024 when the market broke down from a prolonged congestion pattern. This latest move reflects growing concerns over demand, particularly from China, where the economy is showing signs of slowing down. Reduced industrial activity and softer consumer demand in key markets have weighed heavily on gasoline prices, as global oil demand has not recovered as strongly as expected following the pandemic. Additionally, U.S. inventory levels have been higher than anticipated, further pressuring gasoline prices lower.

In terms of supply, OPEC+ production cuts have not been sufficient to offset the ongoing weakness in demand, leaving gasoline markets oversupplied. Despite the cartel’s efforts to stabilize prices, the combination of high inventories and weakening demand has resulted in downward pressure on gasoline, extending the bearish trend into this week.

From a trend-following perspective, gasoline's break down from its congestion pattern in late August 2024 has confirmed the start of a new downtrend. Trend-followers are likely to have entered short positions in the market in anticipation of a continued bearish move. The clear breakdown of key support levels has provided systematic traders with strong signals to position for further downside, particularly as demand remains weak and supply continues to outpace consumption.

As the bearish momentum builds, traders are watching for signs that this downtrend will continue into the coming months. With few signs of a demand recovery and continued pressure from rising inventories, the outlook remains negative. Short positions are expected to be profitable in the near term as long as the market remains in this oversupplied state. However, as always, traders will need to remain vigilant for any sudden shifts in demand or unexpected supply disruptions that could reverse the current trend.

• Crude Oil WTI: -3.32%

Crude Oil (WTI) prices fell by 3.32% this week, signalling the potential start of a bearish trend following a prolonged period of congestion since early 2023. The move comes amid growing concerns over weakening global demand, particularly from China, whose economic slowdown continues to weigh on energy consumption. This decline in demand has been compounded by rising U.S. crude inventories, which have consistently exceeded forecasts in recent weeks, further pressuring prices downward.

On the supply side, despite efforts from OPEC+ to stabilize prices through production cuts, the market remains oversupplied. OPEC+ cuts have failed to fully counterbalance the softness in demand, especially as global economic growth has slowed. Additionally, geopolitical tensions in major oil-producing regions have led to periods of volatility, but the overall supply picture remains robust enough to prevent any significant price rallies.

From a trend-following perspective, crude oil appears to be entering a bearish trend after being trapped in a congestion pattern for much of 2023. This week’s price decline could mark the beginning of a more sustained downtrend, and while it’s still early, systematic traders are likely starting to monitor this market closely for potential short entries. As the downside momentum builds, interest is growing among traders for a possible bearish continuation, especially if prices break key support levels in the coming weeks.

If this bearish trend persists, trend-followers could capitalize on further downside, especially as the fundamental backdrop of weak demand and high supply continues to exert pressure on prices. However, as with any market, it’s essential to remain cautious, as unforeseen supply disruptions or shifts in demand could lead to reversals. For now, traders appear poised to enter short positions in crude oil, anticipating that the recent weakness will continue.

• Rough Rice: -2.80%

Rough rice prices declined by 2.80% this week, continuing the bearish downturn that began after the commodity peaked in May 2024. This move is primarily driven by improved weather conditions and stronger-than-expected harvests in key rice-producing regions, particularly in Southeast Asia. As supply levels have rebounded, the market has moved away from the tight conditions seen earlier in the year. Additionally, stable demand for rice, combined with increased production, has contributed to the downward pressure on prices.

Since July 2024, however, price movements in rough rice have become increasingly congested, with no clear directional bias. This period of congestion has made it difficult for traders, especially those operating on shorter timeframes, to capitalize on any meaningful trends. The lack of consistent momentum has led to sideways price action, creating uncertainty for trend-followers looking for sustained market moves.

For long-term trend-followers, this week’s move likely aligns with the broader bearish trend that has been in place since May. Traders positioned short in the market would have greeted the continued weakness, as the overall downtrend remains intact. However, for short- to medium-term trend-followers, the current congestion phase has likely limited participation. Without a clear breakout from this pattern, shorter-term traders may be staying on the sidelines, waiting for stronger signals that the congestion phase has ended and that a more decisive trend is taking shape.

Until there is a clear resolution to this congestion, long-term systematic traders are likely maintaining their bearish positions, while shorter-term trend followers may be reluctant to engage without confirmation of a new directional move.

Conclusion

This week presented a diverse array of market movements, with notable opportunities and risks for trend-followers. The surge in natural gas and cocoa provided strong bullish signals for those already positioned long, while palladium and energy markets saw declines, reinforcing bearish trends. The SG Trend Index’s rise to a month-to-date gain of +1.96% indicates that market conditions remain favourable for trend-followers, with the year-to-date performance standing at +3.27%.

The significant jump in the TTU Trend Barometer to 55 highlights an increasingly positive environment for capturing trends across the markets. Volatility also surged this week, driven by macroeconomic uncertainties and geopolitical tensions, which offered additional trading opportunities for volatility-based strategies.

For many trend-followers, this week’s results likely led to small gains, particularly for those positioned in bullish sectors like cocoa and soybean meal, as well as those short in palladium and crude oil. While there were mixed results across sectors, the continuation of established trends suggests that the evolving market environment is generating solid potential for profit. Systematic traders, particularly those utilizing short-term models, will be watching closely for any emerging breakouts or shifts in the coming weeks.

List of Resources used in the Week in Review

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