We’ve suggested that the recent rally of more than 50% since August 24th in #11 sugar futures is unsustainable, even to the point that we sold the market early in October in anticipation of its failure. As usual, the market told us exactly what we could do with our, “suggestions.” Fortunately, the consolidation between November and December has provided us with another chance to short the market. This time, perhaps even more decisively thanks to increased commercial trader selling as reported by the CFTC in its weekly Commitment of Traders report.
Sugar futures have rallied more than 40% since the August 24th low. Let that sink in for one second. That’s 40% in 37 business days, a solid rally to say the least. This rally has brought the market back to exactly, unchanged on the year yet, well below the $.30 and $.36 per/lb highs of 2011’s rallies. Interestingly, this rally appears to have been fueled by supply fears shifting to short covering. The main growing regions are preparing for the impacts of this year’s El Nino event even though our own El Nino research has shown that historically, El Nino fears spur rallies to be sold in the sugar market. Furthermore, the recent rally has finally forced many long-term short positions to cover in the face of heavy commercial selling as this rally has progressed.
We began this week by revisiting the sugar futures market. We started talking about it a couple of weeks ago for Equities.com in, “Time to Sweeten on Sugar.” We updated this outlook Monday for TraderPlanet.com. This trade finally triggered on Thursday and currently sits above the $.1310 level that we believe will induce some speculative short covering. See, “Sugar Prices on the Decline.”
This morning’s unrevised Q4 GDP number at 2.2% on declining corporate profits provides just the right ambiance for a what has been a gloomy week. While we had a completely separate trade looking at multi-year lows in , “Time to Sweeten on Sugar,” most of our focus was on the financial markets.
The sugar futures market has been in a slow motion slide for nearly two years. This follows the market axiom that nothing beats low price like low prices and the expected surplus this year further adds to those concerns. That being said, the sugar market is trading at prices not seen since July of 2010. Furthermore, the sugar market’s seasonality should coincide with commercial long hedgers taking advantage of these multi-year low prices. Finally, the sugar market’s inherent volatility tends to reward forward thinking traders as this market can quickly leave its participants playing catch up.