The price of Sugar has rallied over 45% in the last 3 months
As discussed previously, the CRB Index has been in a powerful downtrend for majority of the last 18 months, however not all individual commodities have suffered the same fate. Take for example the prices of Cocoa, which have been in an uptrend since bottoming out in July of 2013. That commodity has done extremely well, bucking the deflationary trend. Furthermore, in recent times, Sugar prices (NYSE: SGG) have rallied over 45% in the space of 3 or so months. Majority of the gains are attributed to the current El Nino weather pattern we are experiencing, throwing supply into question from Brazil to India. Moreover, as Sugar already experienced a devastating bear market in recent years, demand has recovered. Not surprisingly, even ethanol demand is growing too.
The question for speculators now is whether the recent rally is start of something more meaningful or if it was yet another relief rally in a longer term downtrend?
From the short term perspective, Sugar prices are very much overbought, This usually signals that we are due for either a consolidation of recent gains or a more significant correction. It all really depends on what the primary trend is. If we were to ask professionals the same question, according to the recent Commitment of Traders report, smart money (commercials) are betting heavily against the prices of Sugar. These guys are farmers, producers and refined of this agricultural commodity. As they take big shorts, it also means that dumb money (non reportable small speculators) are now heavily long the market. As chart below clearly shows, previous instances when small specs were heavily long Sugar, prices usually at last pulled back. However, when considering the question of whether this is start of a more significant uptrend for Sugar, my advice would be to closely track the current El Nino progress and how it impacts the global supply.
Speculators have now gone heavily long the agricultural commodity
Emerging Markets breadth remains very weak and oversold
Just a quick update today. Emerging Market equities remain in a downtrend on a technical basis, while the majority of the individual EM index components are still trading below their respective 200 day moving averages. The rebound from the August 25th low hasn’t been as strong as the Developed Markets, especially US equities. However, it is prudent to remind investors that some of these stock markets, in particular Russia and Brazil, are trading at ridiculously low valuations and if some positive surprises occur in 2016, upside could be very strong.
Surprisingly, out of all the EM indices, MSCI Russia is the one that has broken above its 200 day moving average first. Being contrarian investors, what we at Short Side of Long have been contemplating recently is whether or not some of these laggards could become leaders in 2016? Moreover, Indonesian stocks have also underperformed rather dramatically and have become very oversold. There is a possibility of a breakout from the current downtrend and at least a bit of an upside for this beaten down market, as investors are currently pricing in a total disaster.
Russian market is extremely depressed, but remains in a downtrend
Could the Indonesian stocks breakout from a strong downtrend?
Finally, MSCI Brazil has been doing pretty well recently, despite all the negativity and fundamental data deterioration. Regular readers of our blog will remember that we were lucky to call an intermediate bottom in the Brazilian Real on the 24th of September, which has obviously helped the Brazilian equities when priced in US Dollars. Despite certain positive steps being displayed from the technical perspective, this Latin American index has yet to reverse its downtrend. We will be watching some of these markets closely and could even consider them for a trade in coming days or weeks ahead.
Brazil performance is awful, but could be showing signs of a bottom…
Peaking February 2011, Copper prices have been declining for years
Copper prices are making six year lows and the bears are back. Peaking all the way back in February 2011, at a very high prices of $4.65 per pound, high grade Copper prices have now been declining half a decade without a strong rebound. According to the recent Commitment of Traders report published on Friday, hedge funds and other speculators are once again pressing short bets against the metal. They have been doing this quite consistently since early 2013. Furthermore, according to SentimenTrader, optimism index has declined below 20% for the first time in almost 15 years. One has to be reminded that its perfectly normal and very common for sentiment to be bearish during a downtrend, however it is at major selling climaxes that sentiment becomes overwhelmingly one-sided and the pendulum swings reversing the trend.
Will Copper be able to establish support on an important trend line?
So are we witnessing a selling climax in the price of high grade Copper? It is difficult to say. Bulls could argue that the downtrend is now accelerating rather rapidly, which means investors are panicking and liquidating the metal together with the baby and the bathwater (as already confirmed by the sentiment discussed above). Moreover, bulls could also argue that the price has fallen on to an important decade long trend line, which could prove to be a strong support (see the chart above). On the other hand, bears would argue that overcapacity in the overall industrial metals space is set to continue. Add to that mix Fed’s intention to rise interest rates, which should strengthen the US Dollar in longer run, and its hard to see Copper, or for that matter, any metal rising on a sustainable basis.
Contrarians & smart money are betting on companies such as Freeport
Contrarians and smart money investors such as Carl Ichan, have taken bullish bets on companies such as Freeport McMoRan (NYSE: FCX) with a view on future Copper price rebounding and a total overhaul of companies capex, salary structure & cutting of high cost production. Freeport shares are approaching a major historical floor (buying zone) which should be a great entry point for the next bull market rally. Moreover, recent rise in trading volume, which hold similarities to the panic of 2008, indicates that retail investors (dumb money) are liquidating shares, while smart money (Mr Ichan) is accumulating at bargain prices. Personally, I am still sitting on the sidelines and watching, but I do have Freeport McMoRan shares in my watchlist.
CRB Index has spent almost 1.5 years trading below its 200 day MA
Yes, we understand that everyone hates commodities with sentiment so universally bearish. And yes, we also understand that you will probably disregard this post because you have no interest in buying any commodities. And yes, you will easily find abundance of fundamental reasons as to why commodities will go down again in 2016… and 2017 too. And yes, we here at Short Side of Long aren’t going to bother arguing with you late into the night about this topic.
However, do consider that from a contrarian point of view sentiment is ridiculously low, while prices are very deeply oversold. Raw materials represented by the famous CRB Index, are now trading at levels last seen in 2001 of 184 points. Furthermore, the price range between 175 to 185 is a major support zone dating all the way back to 1973. Will commodities be able to bounce from this important memory zone, which buyers have defended for generations? Even if we told you there is an above average chance, you probably wouldn’t believe us.
Commodity prices have fallen on a support zone dating back to 1970s
Source: Stock Charts (edited by Short Side of Long)