It's Time to Sweeten Your Portfolio With Sugar

 | Jun 08, 2017 | 12:33 PM EDT
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While most investors don't think about commodities when looking for new names for their portfolios, there are times when they warrant consideration. Now is one of those times, and sugar is the commodity. (SGG) is the iPath Sugar ETN, which trades on the NYSE, and tracks the price movements in the commodity.

As recently as last September, the crowd was hooked on sugar, believing it was certainly going higher. Unfortunately, the crowd reached that conclusion after SGG had just spent an entire year rallying from the mid-$20s to the mid-$60s.

It turns out the crowd typically reaches its most extreme position exposure (certainty that price will continue in the direction it has been moving) at the end of a stale trend, rather than positioning in advance of a new trend. The Commitment of Traders survey tracks this certainty, and now shows speculators (which are mostly trend-following hedge funds) at their largest short exposure since fall 2015.

Back then, SGG was ending a decline from late 2013 that had taken price from the mid-$60s to the mid-$20s. This crowd had been extremely long at the 2013 highs, switched to extremely short at the 2015 lows, got extremely long again after the 100%+ rally to the 2016 high near $64, and are now extremely short as price breaks back into the $20s.

History shows these speculators are about to be wrong again, and that SGG's decline is about to bottom, and reverse for several months of rally. While this is an interesting correlation, it's not enough for our DSE (decision support engine) to generate buy and sell signals alone. As we demonstrate in real time in our Trading Room and DSE Alerts services, the DSE's algorithms require many levels of independent indicators to align before forecasting trend changes and price targets.

Earlier today, followers of the DSE were warned that the declining trend of the past nine months in SGG is about to end, and a new uptrend is about to begin. Unfortunately, the speculator crowd doesn't pay attention to DSE's signals. Those that do should benefit by ending selling actions and beginning buying actions in the 26 +/-4 zone, which price has just entered.

Look at this weekly bar chart's stochastics indicator diving below the oversold 10% extreme threshold. This is historically not the time to be short or selling SGG. In fact, the last time these stochastics were this oversold was August 2015. Four months later, SGG had risen to $36 from $24, a 50% rally. The DSE warns that shorts should be exited here, and long exposure established in the $20s, as defined above.

Another of DSE's component indicators are the standard deviation bands. Notice that price has slipped below the two-standard deviation band (olive/gold line at $31.50), which controls 95% of normality. This also happened last month, before a 20% oversold bounce, but hadn't happened before that since the 2015 test of this statistical extreme, when SGG was bottoming around $24.

Finally, for the purposes of this brief analysis, DSE's pattern recognition algorithms are suggesting that the next new low in the high $20s is all that is needed to complete the declining pattern from the $54 peak last year.

Combining these independent and objective tools, the conclusion suggests that $32 should be used as a buy stop level to protect any short profits, as well as the place to join the new trend once it has reversed. Additionally, SGG moving below $29 should be used to exit shorts, and begin establishing long. This should allow an average price of around $30 for those wishing to enter before the new trend begins.

For updates on this analysis, as well as other trading opportunities, try Ken Goldberg's DSE Alerts service for free for a couple of weeks, or contact him at support@dsetrading.com

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