The sugar market has suffered from surplus production for five straight years. This is set to change in 2016 as the El Niño weather pattern has created major supply disruptions in the primary growing areas of India and Thailand. The International Sugar Organization (ISO) raised their forecasted supply deficit from 3.5 million tons to 5 million tons in February. The sharp 139-point jump on Feb. 22 was the largest single day move since October 2013 and the largest single day percentage gain since March 2011. Commercial end users were in touch with the market’s pulse as they reached their largest total position since February 2010, just ahead of the ISO’s announcement. 

The recent 30% + rally pushed prices briefly above the 200-week moving average for the first time since July of 2012. Along the way, the commercial trader group laid off their purchases, selling 150,000 contracts during the ensuing month-long rally. They aren’t afraid of the market getting away from them because of weather issues. Therefore, resistance at the 200-week moving average (approximately 16.5¢ per/lb.) is being defended as the market reached its highest prices in more than a year. Waning weather threats and a slowing global economy should provide the catalyst for the market’s typical seasonal weakness into the end of May or early June. However, the broad trend should now be higher. Therefore, look for additional commercial buying below 15¢ to support prices. Finally, any further tightening beyond the currently expected shortfall of 5 million-6.8 million tons could create a strong sustainable trend as the deficit is expected to last through 2017. This would coincide nicely with the July world sugar futures contract’s tendency to expire on its highs.

The major stock indexes have a similar long-term play. The Commitments of Traders report provides several streams of data, and proper analysis requires the context of one to give meaning to the other. The commercial trader net position is the commercial short positions subtracted from commercial long positions. This provides a net balance figure that we use as an indication of sentiment. The total position however, assigns a value of “1” to each contract outstanding and serves as a proxy for degree of interest. The more contracts outstanding, the more interest and weight we give to the current net position. 

The commercial traders reached their most bullish net position since December 2011 in the S&P 500 futures. However, this occurred on one of the smallest total positions since 2008. In other words, the commercial traders trading the S&Ps are bullish, but are relatively few. This isn’t just an issue in the S&P 500. The Dow futures have the smallest total commercial position since July 2009 and the Nasdaq has the smallest total commercial position ever. The lack of commercial participation is an indication that they’re just as confused as the rest of us, regarding domestic vs. international growth and deflation. It is not clear which way this will resolve itself but the scant clues that have been provided so far suggest a wave of selling could be waiting for new highs in the S&P 500, Dow and Nasdaq. This would coincide seasonally with the old saw, “Sell in May and walk away.” Hedge accordingly.