Before I start this post, I would just like to mention that I have received a few questions regarding the previous post about Gold's trading range. Instead of answering each email, what I will do is put forward another update tomorrow as requested and explain things a little bit further, as some seem confused with my last post. Furthermore, as already mentioned, blog posts will now be a lot more frequent. Enjoy!
Chart 1: Sugar continues to be an awful performer
Source: FinViz
The price of Sugar continues to linger in the doldrums of a cyclical bear market. Looking at the table above, we can see that many commodities remain awful performers. Be it industrial commodities like Crude or Copper, or the Precious Metals like Gold & Silver, it is evident that commodities have suffered in recent years and those invested in them have not benefited... yet (by this I mean me). Sugar remains one of the worst performers out of all commodities, only outdone by its Soft commodity cousins Coffee and Orange Juice (which also remain depressed too).
Chart 2: Depressed performance signals major low is at hand
Source: Short Side of Long
If we look at the data a little bit further than just a 12 month span, we can notice that Sugar has actually been depressed for even longer. The current underperformance resembles that of 1998 and 2001, which were two major lows for not only Sugar, but the whole CRB Index. If the technical readings above are anything to go by, we are edging ever closer to a major low in Sugar prices and a beginning of a new cyclical bull market (and quite possibly this could be true for the overall CRB too).
The first thing we will hear from the bears is the fact that the Sugar supply remains in a huge glut. I agree - of course it does, otherwise the price would not have corrected 50% from 36 cents in February 2011 towards 18 cents today. In other words, Sugar prices have already gone through a 2 year cyclical bear market and have essentially halved in value. One thing I have noticed recently is that the oversupply of Sugar is starting to slowly but surely dwindle. China has started importing large amounts in recent months and the price definitely shows reluctance to sell off sharply despite all these "unfavourable conditions".
The first thing we will hear from the bears is the fact that the Sugar supply remains in a huge glut. I agree - of course it does, otherwise the price would not have corrected 50% from 36 cents in February 2011 towards 18 cents today. In other words, Sugar prices have already gone through a 2 year cyclical bear market and have essentially halved in value. One thing I have noticed recently is that the oversupply of Sugar is starting to slowly but surely dwindle. China has started importing large amounts in recent months and the price definitely shows reluctance to sell off sharply despite all these "unfavourable conditions".
Chart 3: Technically, Sugar looks ready for a big move!
Source: StockCharts / Short Side of Long
Looking at the chart above, we can see the full price action of the two year old cyclical bear market in Sugar. Having peaked in early February 2011 around 36 cents, Sugar sold off rapidly into May 2011 low at 20 cents. After a bear market rally peaked around 32 cents (which I participated in), Sugar has cascaded lower and lower in price for quarters on end. The prices first broke 20 cent support in June of last year and since then have failed to stage any meaningful type of a rebound whatsoever.
Source: SentimenTrader / Short Side of Long
The current price action looks, feels and acts like one of despair, where bulls have completely and utterly given up. Sentiment indicators confirm this, but in all honesty, did anyone expect otherwise after a 2 year slump and a 50% sell off? Hedge funds have reduced net long positions to some of the lowest levels in over 5 years, while Public Opinion has dropped to levels that are usually associated with intermediate lows. A buying opportunity could be close at hand.
Chart 6: Price has spent a prolonged period below 200 MA
Source: Short Side of Long
Furthermore, the chart above shows that prolonged periods of time where the price trades below the 200 day moving average, usually signals that a major bull market rally is around the corner. Sometime this prolonged period takes 12 months or so, and sometimes it can be 24 months or longer. The important point is that the longer prices remain depressed the stronger the bull market will be on the other side of it. The current depressed period is the second longest in almost two decades and in my view promises a spectacular rally in the coming quarters and/or years to come.
What I Am Watching
Great article!You beat me to it(as I'm currently writing on sugar myself).I am very bullish on softs and sugar is my favourite pick:very very bullish fundamentals coupled with excellent technical/sentiment setup.
ReplyDeleteYou're spot on in pointing out that the oversupply is old news...the question an investor now has to ask himself is:how are brazilian mills going to turn a decent profit at these prices?As you mentioned before,you're well aware of the fact that said mills are not seeing their best period,financially speaking...
Moreover all the bears must have got an no-pass grade in economics 101:as the price of sugar goes down,new demand is created as it becomes competitive with other sweeteners(like HFCS)and/or it can be afforded by more people/for more uses/in larger quantities.
Hi, I haven't read the all article yet (maybe I should) but it is said that "Financial health of Brazil mills to improve as costs fall".
Deletehttp://www.reuters.com/article/2013/02/04/sugar-costs-idUSL5N0B40CK20130204
F.
I saw the article and I disagree with that statement:as costs fall,so do revenues,hence little or no margin improvement(which is all that matters).Moreover it conflates a temporary phenomenon(a bumper crop)with a structural one(the sorry state of Brazilian mills):the former can,and most likely will,go away next season,the latter is here to stay(probably for 2/3 years).
DeleteOne good news here is that the Union of Russian Sugar Producers has said it expects the area planted in beets to drop by 8.4 percent next season.
DeleteF.
Good article. Why do you see Sugar as a more attractive investment over coffee and/or cotton?
ReplyDeleteAlways a great privilege to read you. Sugar & Coffee could be major contributor to investors 2013 P&L.
ReplyDeleteMy model predicts Sugar to lead its reversal late Q2. All models are wrong but some are useful. Fingers crossed ! :)
Happy trading everyone.
Interesting article.
ReplyDeleteWhat is the easiest way to invest in sugar? Is there a way without doing a basket of soft commodities?
SGG is an ETN indexed on DJ UBS-Sugar index.
DeleteF.
Tiho,
ReplyDeleteCame across this article re $SUGAR which i thought might interest you and your readers.. a short piece on US sugar protectionism..
http://www.aei-ideas.org/2013/02/protectionist-sugar-policy-cost-americans-3-billion-in-2012/
Regards,
Alex
I think (know i may be proved wrong) we may see a few commodities namely gold, silver, coffee, sugar give a wedge break downwards before breaking to the upside (eg a bear trap).
ReplyDeleteIt seems everyone in todays world has no patience and are technicians or traders rather than investors and are following charts rather than value & other trading indicators. I can see a few weak hands finally throwing in the towel if this happens, before we then resume the uptrend.
I took a position in sugar back in Dec (i also bought into coffee) at the sentiment low and will go back in again with the repeated low in sentiment.
On another side in equities, i have been reducing my exposure over the last 2 weeks to the Aus share market. This was re-inforced today when i heard a number of my colleagues speaking about going into the market and buying bank shares with high dividends. These are the same individuals that got burnt on margin back in 2008 with the GFC. As i posted back in late Nov my equities model turned to a buy then, but now the model is showing warning signs with sentiment peaking and market breadth reducing. This is not to say it cannot go higher but i am reducing my exposure and rotating my capital.
Keep up the good work Tiho, good to see you are a leader in your thinking & trading.
Phil
How glad I am to finally see some serious capitulation in the PMs market!This is exactly what is needed to eliminate the excessive speculative fervour that was ignited by last autumn's surge.Many badly burned small specs will now leave this market alone for quite a while I suppose!Comments on various forums confirm this view.Next week's CoT report should see a large drop in commercials' shorts.And judging from its volume I bet that today GLD saw a huge outflow of the kind that generally marks bottoms.Silver also shows remarkable strength,but I am not sure whether that's really a positive,as the CoT data still show a lot of weak hands in the market:a more powerful washout would have sent a clearer signal.
ReplyDeleteThe PM & miners ETFs are all showing signs of capitulation. Sentiment is very low, while in equities we are seeing the opposite. I believe we may be seeing a trend change in the very near future. Phil.
DeleteHey Tiho,
ReplyDeleteEquities and PMs are both overstretched - one to upside and the latter to the downside. Can you give please us an update on the DSI (sentiment)?
Doesn't it worry the gold investors a tiny bit when cb's are buying at record volume and still the price is falling now?
ReplyDeleteWhat happens if they stop?
After a 12 year fantastic run, there's a big probability that they who hold it now, will end in tears...
People are quick to forget that commodities rallied for a number of years prior to central bank printing but that certainly could cause a mini wash out of the weak hands but I don't think it will crush the market as many are already over sold. Gold and Silver would be more effected though as there hasn't been a real wash out there yet
ReplyDeleteApologies for the lack of updates in recent days. Way too many friends are celebrating their birthdays and way too many catch ups have occurred between old friends... something which gets more rare as we get older and busier with our lives!
ReplyDeleteJimmy Rogers was very bullish in 2011 when it was 30-c .
ReplyDeleteHe's been awfully quiet since then , so it's probably time to BUY
The German sentiment indicators are showing no bullishness this week. The equity exposure of short term institutional traders (measured by animusx) is near an all-time-low. MDax makes new highs every week. Even though the DAX looks weak considering the last weeks, the German sentiment picture doesn't support short-positions, at least for the near future.
ReplyDeleteGerman Gold-Sentiment is at -20%. Low enough for a bounce, but this time I would prefer -50% or lower, before I see a buying opportunity.
The Rydex Nova/Ursa ratio is very bearish, despite the impressive rallye. All in all,for short term traders it is not the time to be short in equities, and it is too early for buying PM.
Ben
Hi Tiho, I've made my own research on oversold market with great opportunity. It's very CLEAR that uranium, rare-earth (HRRE) and coal are going to outperform in the coming weeks or months. I already hold share of the leader in uranium market that has made nice profits and I will probably consolidate with a junior player. Potash looks very intersting too. Have you made some research and analyse on these market and what is your opinion ?
ReplyDeleteTx,
F.
The Rothbardian Investor - I am glad to read your thoughts on Sugar. It seems you understand the situation quite well yourself. The way I see it, Sugar has corrected over 50% from its highs over 2 years ago. At this price, farmers aren't really rushing out to plant a record harvest, if you know what I mean. The basic economics 101 (supply & demand) therefore states that eventually we will have a mean reversion of some kind (like we always do) as shortages eventually become apparent. If we link that to oversold price and extremely negative sentiment for a prolonged period of time, it is definitely possible that as a worst case scenario a strong rebound is in the cards, and as a best case scenario Sugar could be at a cusp of a new cyclical bull market.
ReplyDeleteAlexander Beasant - While it is difficult to give you the whole story with just a few lines in the comments section, I'd argue that Sugar holds the best potential because of its supply and demand dynamics. The way I read the market, Asia as a continent has not yet become a huge consumer of coffee and cocoa like Europe and North America has. However, China is the largest consumer of Sugar in the world and that is only set to grow in coming years. Furthermore, Brazil (the largest supplier of Sugar) has mismanaged its production. In my opinion, about third or even close to half of its processing mills are on the brink of bankruptcy. While the prices are depressed now, the situation could change in years or even quarters from now. Eventually, I believe that we are moving towards a shortage driven panic spike.
Alex - thank you for the link to the article. It was an interesting read!
JJ - While his timing is not the best (who's timing is actually very good anyway?) Jim Rogers is a contrarian investor himself. I do not know if it actually makes sense to do the opposite of a contrarian. I do admit that everyone is wrong from time to time, including the best. After all, it was Livermore who said that no one can consistently beat the market all the time.
I agree:the usual economic dynamics will take care of the current oversupply(low prices will entice demand and discourage production),whilst the fundamental driver that will ignite the next bull(which I expect to be a major one,at least exceeding the 2011 high of 36$c)is the crisis of the Brazilian milling industry.I bet you saw this already:
Delete"At the moment, there is already confirmation that six mills will cease to process sugarcane in the 2013/14 season. Furthermore, only two new producing units are expected to begin operations in the coming year, which is a considerable drop from prior years. For example, in the 2008/09 season, 30 new mills were launched."
I also think India could play a role in the coming bull,both for exogenous(a current water shortage)and endogenous reasons(their moronic regulations,chief amongst them the FRP policy,which do nothing but render the production cycle extremely volatile and of course hamper the development of the local industry:if they do not change course I suspect India may become a chronic importer,although this is just a longer-term "prediction" which has no bearing on my decision to invest in sugar).
All in all,I would not dislike another couple of quarters of depressed prices,as they would only aggravate an already serious situation,thus resulting in an even more powerful bull.In any case I'll keep accumulating on any meaningful slump(this week might indeed provide a buying opportunity).
Phil - thank you so much for kind words and very interesting comments.
ReplyDeleteBefore I comment on PMs and Gold in particular (which is the theme of the next post published later today), I found it very interesting how comments in this post very quickly turned away from the topic (Sugar) and back towards Gold. There is no denying that Gold is the most popular commodity and probably one of the most popular assets, as it has managed to rise 12 calendar years in the row. And this is what always worries me, despite a consolation of 16 months already.
The Rothbardian Investor & Phil - Yes I agree with both, GLD suffered a rather big outflow today. Furthermore, Put volume jumped across the board from GLD to SLV. Breadth readings in the GDX are all in single digits, be it short term or long term perspective. Public Opinion on Gold is now one of the lowest in the recent 5 year history. All in all, as more investors turn bearish on Gold, the closer we will get to a low.
Anonymous February 16 @ 11:32 AM - More in the up and coming post on stocks, bonds and gold.
Anonymous February 16 @ 10:44 PM - Central banks are 16% of last years Gold demand. While that is a decent number, it is by no means the strong part of demand. Furthermore, one has to ask themselves, which central banks are buying? I believe that when Vietnam buys, it is not really a contrarian indicator. However, if Bank of England was to buy Gold... now that would be a worry. Let us all remember that it was Bank of England who sold their Gold in a series of auctions between 1999 and 2002 - at rock bottom prices, thanks to Gordon Brown. This is known as the "Brown Bottom".
Ben - Always good to hear from your perspective. From the longer term point of view, I believe that the Dax has approached its upper range from the 2000 and 2007 highs and it has now started to correct. I do not think we will automatically decline rapidly and could start a topping formation. All in all as I've stated back when DAX 30 was around 7,200 - I believe the majority of the gains are now finished in this bull market. The uS stock market is overdue for a bear market and DAX / FTSE / GEMs would also be dragged down under that scenario. We have had a tremendous rally in Germans stocks from the low around 3,500 in March 2009 and furthermore from the low of 5,000 in October 2011. I am not super bearish on German shares, but I do believe one more bear market is in the cards before we are at a generational low.
ReplyDeleteF. - Cameco Corp lost over 50% in the uranium bear market which peaked in February 2011. Technically we could be forming a double bottom around $17.5 and eventually there could be a recovery of some kind. I have my eye on Uranium as well, but at the moment I still hold no positions. In general I think the S&P 500 is just overvalued and I am afraid if the stock market corrects, everything "risky" could be affected.
Tiho,
ReplyDeleteyou make a very valid point, gold is 15% below its 2011 nominal high, sugar is 73% below its 1974 high. There are not many things that are 1/4 of their price from 40 years ago!!
However this is my personnal opinion, MF global is in a lot of peoples mind, physical PMs offer a safer place to store ones wealth, than futures or agricultural physical deliveries. Hence from a purely emotional persective people will focus on PMs rather than a soft, while objectively sugar would be the place to put your money. Phil
DOW shows very clear sign of weakness. Many OECD countrys are now in recession and breakdown is propably to occurs soon.
ReplyDeletehttp://stockcharts.com/h-sc/ui?s=$INDU&p=D&yr=1&mn=0&dy=0&id=p24413641771
Copper lost 1.4% right now and falls to near 3-week low on growth concerns...
F.
Dear Tiho,
ReplyDeleteI would appreciate, if you make some comments to the singapore dollar. Seems to me that there is a bottom.
Ben
not a bottom, but a top, sorry
DeleteBen
Thank you for all the comments. Ben I will definitely try to cover Sing Dollar in the future.
ReplyDeleteHI it is a nice post my friend.
ReplyDeleteAnd I would like to invite you to add add your grate blog posts to www.myshouter.com, a visual social bookmarking platform ,and let more corud to find your grate posts.
Thank You Very much.I wish for your success !!
"Current prices are not viable for exports," Abinash Verma, director general of the Indian Sugar Mills Association (ISMA), told Reuters.
ReplyDelete"As of now, no, we are not exporting. If the prices remain the same, then it will not be viable for us to export."
http://www.financialexpress.com/news/export-of-sugar-banned-for-up-to-3-years-by-indian-government/1076979
Ok tiho for what this is worth and maybe nothing at all, but... and i will give you all i can. USA sugar in south florida Sold all ( that they would dare)of their sugar 3 years out and durring the spike over 30. We got this from a friend of the family Tris Chapman. He is head of the Orange Juice plant there. Now they are not the only producers, but someone out there is getting expensive sugar delivered to them.
ReplyDeletewhat that effect would have i am not sure. Although i asked at that time would would they buy back on the hard correction and the answer i got was they are not in the bussiness of tradeing. So they would not be lifting the price any after it fell. This is probably usless info and about along the lines of Zerohedge buy i thought i would toss it out
Global X China Financials ETF (CHIX) is created to measure the performance of financials sector in China. The performance of the fund varies upon the
ReplyDeleteindividual companies in which fund in invested. CHIX fund comprises the list of companies which are dealing in the financial sector of China or native to China.