Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!
The cocoa market sharply reversed course yesterday, pushing to a new high for the year to its highest price level since August 2008. It was backed by bullish outside market influences and economic euphoria. Another round of bullish corporate earnings reports and news of a rise in existing home sales seems to be reviving optimism that economic conditions are improving. Investors appeared to be buying cocoa on the notion that commodity demand is set to improve. A better than expected earnings report from Hershey may have provided an additional buying incentive for the bull camp by igniting more demand hopes, even though the 5.9% jump in 2nd quarter sales were due to product price hikes while product volume declined. Yesterday’s cocoa rally certainly seemed to be part of a speculative buying wave that was seen across a wide variety of physical commodity markets. That wave was tied to a push lower in the Dollar, which raised investor risk appetite and the appeal of alternative investments such as cocoa as an inflation hedge. After a move like yesterday’s, it isn’t surprising to see some type of pre-weekend profit taking, and we have already seen cocoa price retreat a bit in the overnight trade. However, if the equity and Dollar action remains bullish, we also can’t rule out further gains in cocoa, as both trend following and Index Funds were thought to be active buyers yesterday. Taking out the February high points to $3,023 as potentially the next upside target for September cocoa. But as cocoa prices are pushed higher, we still believe the market is moving further beyond its fundamental value. A move in September cocoa back up towards $3,000 would put the market back in the vicinity of the highs reached last July, prior to the financial crisis. We hardly think economic conditions have improved enough to justify cocoa at these price levels. On the other hand, Index Funds were net long only 17,655 contracts of cocoa as of July 14th, according to the latest COT report, compared to a record net long position near 31,000 contracts reached last June. This could give the market additional buying capacity, especially if economic optimism continues to build.
TODAY’S GUIDANCE: Given the Fed’s assessment of the economy we do think the economic optimism is becoming overblown, and that leaves cocoa looking fundamentally expensive. Cocoa has pulled back in the early overnight trade, which leaves the market a bit technically weak if prices don’t follow through higher. But there may not be too much downside follow through yet if equities build on overnight gains and if the Dollar weakens further.
TODAY’S MARKET IDEAS: Cocoa is looking fundamentally expensive, and we think the market is setting up for an extensive correction. But given the potential for wide price swings, traders looking to get short cocoa should consider option plays.
