A Falling Knife or Opportunity of the Year?

A Falling Knife or Opportunity of the Year?

August 21, 2018 Off By Chuck

Picking bottoms is impossible to do consistently as it means having to catch a proverbial knife.  Plus, bottoms can sometimes take months or longer before they begin to payoff that most investors lose interest, bail and then miss out on the majority of the opportunity. Take a look at the 10 year chart of coffee below. You can see yesterday it touched the $1 area where, in the past (2008 & 2013), its price has found a bottom. Not only did it find a bottom, in both cases it rallied more than 100%. The possibility of capturing even a portion of another 100% return is captivating.

There are a couple of major obstacles that an interested investor will face in this opportunity. The first is how to invest. Going out and buying a pallet of Starbux coffee and hoping to sell it for higher in the future is not a great plan. Coffee is easily tradeable on the futures market if you have a futures account. For those that don’t, there’s an ETN that can be purchased in your brokerage account that attempts to track coffee’s daily price movement, BJO. The downsides of this approach is that BJO is a new issue, it’s relatively thinly traded, an ETN which is subject to contango and a rising dollar.

Still interested even after all that? My next chart should seal the deal. We all know that the commercial specialists are considered the smart money and how they are invested should be paid attention to.  Below is the most recent chart of the CoT data for coffee. As you can see the commercial specialists have the greatest long exposure to coffee that they have for the past 5 years. In fact, if I had presented the 20-year chart instead, the data would not have changed … the smart money is long and long BIG

I hate picking bottoms. Not because it’s that difficult but because not every bottom is v-shaped (like 2013). In many cases bottoms are long drawn out (2008) and I get impatient, lose interest and bail on the opportunity. If you are considering taking a position in coffee that is something more than just a morning pick-me-up, your patience could be tested. If you are not the kind of investor that is willing to let opportunities develop, I would suggest you move on and look for another setup. If, on the other hand, the upside potential outweigh your impatience, I think coffee is setting up for one heck of a reversion-to-the-mean profit opportunity.