The International Sugar Organization (ISO), assuming average growth in global sugar demand forecasts a looming world production deficit of more than 6 m tonnes over the next two seasons. It also forecasts a 2.3m tonne shortfall in 2015-2016. This is the first shortfall in six years. Sugar, driven more by the invisible hand following deflationary forces than the ISO forecasts, has been mired in a bear market despite production deficits since 2011.
Investors, driven by their emotions rather than discipline, focus on headlines that cater to them. This tendency prevents them from recognizing opportunities in markets ignored by headlines. While investors focus on sharp declines in Chinese and US stocks, they continue to miss opportunities in less-followed markets such as sugar (see COT Matrix).
Price
Interactive Charts: CANE, CANE PF, SUGAR
A negative long-term trend oscillator (LTCO) defines expansion and down impulse from 14.51 to 9.43 since the second week of July 2014 (chart 1). The bears control the trend until reversed by a bullish crossover. Compression (white circles) generally anticipates this change.
A close above 12.89 jumps the creek and transitions the trend from mark down to cause. A close below 8.39 breaks the ice and confirms continuation of mark down.
Chart 1
Leverage
A negative long-term leverage oscillator (LTLO) defines a bull phase since the third week of September (chart 2). The bull phase, a conflicting message from the leadership of leverage and price, suggests consolidation/profit-taking against the down impulse (see price).
A diffusion index (DI) of -89% maintains a string of strong bearish setups and Q4 distribution (chart 3). A capitulation index (CAP) of -8% supports this message (chart 4). DI and CAP's trends, broader flows of leverage and sentiment from extreme distribution (red dotted line) to accumulation and extreme complacency (red dotted line) to fear supporting the bears (green arrows), should not only continue to extreme concentrations but also restrain upside expectations until reversed (see price).
DI's string of strong bearish setups has been tightening risk management for the bulls and supporting the faders (the bears) since the fourth week of October. DI readings of -100% from the fourth week of November to second of December, rare observations that define extreme distribution and trend imbalance, urged investors to fade the expectations of the majority.
Continuation of the rally under these trends represents, a sign of strength (SOS), would be bullish for sugar longer-term.
Chart 2
Chart 3
Chart 4
Time/Cycle
The 5-year seasonal cycle defines strength until the first week of February (chart 5). This path of least resistance restrains downside expectations over the short-term (see price). Q4 distribution, most often a precursor to a bear phase, supports continuation of the bear market after seasonal strength.
Chart 5