With the market gyrating back and forth with no real conviction either way, I have been looking for uncorrelated trades, which can protect me from the non-stop risk on/risk off algo controlled market. Well I think I have found an interesting short opportunity: Sugar.
Below is a chart of SGG, the ETF which tracks Sugar.
You can see from the technical setup that Sugar is looking very heavy, with a possible double top pattern. Along with a weak technical picture, Sugar also faces poor fundamentals. The market is expected to be in surplus of at least 5 million tons for the 2011/2012 season. The only news that supports the market is a lower than expected harvest out of #1 exporter Brazil. However, this decline in output will be easily offset by record crops in Thailand, Europe, and India, along with strong harvests out of Russia and Ukraine. So we have a situation where the price of sugar has been bid higher on Brazilian crop concerns, but this should be short lived as market participants realize that the market will be well supplied.
Another reason I like this trade is because sugar has a very low correlation with the stock market (around 0.1), which provides at least some diversification.
Finally, the sugar market is dominated by long speculators right now. Non-commercial traders are currently long 155,000 contracts, meaning that they will be quick to sell on any decline. Another bearish indicator is the fall in open interest, signaling a lack of conviction in this latest up move.
The trade is pretty simply. Short SGG with a stop at 105.
UPDATE 9/16/2011---Well obviously I got really lucky on my timing on this trade. At the time of this writing 11:18 am pst, Sugar is down over 5% on a Canplan report, which suggests the Brazilian sugar crop will be stronger than expected. I am still short. There will much more long liquidation in the days to come.
Black Swan Insights
Disclosure: I am short SGG at 100.40