Our fund just closed positions on the Sugar early this morning, which we bought in early May 2011. Our profits on this investment were quite large to be honest, at 43% gain in price with 2:1 leverage, meaning over 86% return on risk with large sum of money invested.
Please consider the section of the recent article concerning Sugar below:
"Announcement of frost related supply cuts from Brazil – the world’s top producer – was compounded by news that China – the world’s second biggest consumer – may restock by 600,000 tonnes more than its usual quota of 1.9 Mt this year. A Bloomberg survey of the industry finds a median expectation that sugar futures could continue to gain."
Sugar news is extremely favourable for continued rise in price. We have news from China and Indonesia of strong demand; and we have news out of Brazil of weak supply. Unica, main governing body for Sugar supply, has capitulated and now revised the output of production towards lower levels. With all these favourable outcomes, why did I close Sugar positions?
Because the market has most likely priced in all of these events. As of last night, the price of Sugar failed to make a new high, which was very critical, under favourble news and demand/supply conditions. I regard this as a highly negative signal. Another negative sign linking to this is the outside day reversal candle (chart below). Technical candlestick patterns like outside reversal days near tops or bottoms hold much more relevance than at any other random time.
It was Marc Faber who first taught me that when a price of an asset fails to make a new low on unfavourable news, it could be starting to price in more favourable conditions. The same is true for an asset that fails to make a new high under very favourable conditions.
Therefore, on any major weakness or extreme sell off, I will consider re-entering the market again, as long term fundamentals for the Sugar market remain extremely bullish. However, in the medium term, I think the bulls have completely priced in recent supply shortages out of Brazil and we could experience quite a large correction.