We’ve spent a lot of time deciphering the age-old chicken and egg adage as it relates to trader behavior and seasonality. Is seasonality driving traders’ decisions or does the anticipation of a seasonal tendency become a self-fulfilling prophecy?
We mentioned the soybean decline last month noting that it had begun to attract processor buying, which pushed the net commercial trader position to a bullish record and is now above the 130,000 level mentioned last month. Commercial traders are value players. Soybeans are the cheapest they’ve been in more than a year, and bean processors are taking advantage of this opportunity ahead of any late summer weather concerns.
Conversely, this places the speculators on the side of pressing a falling market lower. They just set a record net short position. There is plenty of money to be made on the short side of commodity markets, but betting against the commercial traders at market extremes is typically a fool’s errand.
Speculators are currently short 1.7 contracts for every contract they’re long as November beans test the $9 per bushel level. Whether the speculators are trend-following or short-selling ahead of anticipated late summer weakness, the odds suggest a good portion of them will take losses on a short covering rally before the market falls through $9 later this summer. After all, these are the same traders that set a net long record at last June’s high.
The cocoa market is exhibiting similar behavior as the speculators set a net short record position ahead of cocoa’s late September seasonal weakness. Speculators may be overanxious. December cocoa is well supported at $1,800 per metric ton as grinders step up to lock in supplies. Grinder support coupled with an extremely oversold speculative trader position leaves this market ripe for a short covering rally and test of resistance at $2,125 in the December contract. This rally may be sold ahead of the seasonal weakness, but long-term traders will want to focus on any decline below $1,800 as a buying opportunity. The long-term fundamentals support a nearby price floor.
While cocoa has yet to bottom, coffee may have already made its low for the December contract near $1.19 per pound. Coffee has been in a multi-year decline, but coffee grinders have never bought this aggressively. They just passed their previous net long record established in November of 2013. That episode saw the market run from $1.55 to $2.58 in just four weeks. We aren’t suggesting that there’s a one-month run worth more than $30,000 per contract, but pay attention for reversal signals. They can develop quickly.