Coffee: A Cup of JO

08/13/2015 9:00 am EST

Focus: STOCKS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Coffee typically tends to start a seasonal bottoming process before distributors begin buying ahead of anticipated demand in the upcoming cold winter months, explains seasonal trading expert Jeffrey Hirsch, editor of Stock Traders Almanac.

As such, this is the time to cover the best seasonal trade short position from May. It is also a time to look for a short-term trade opportunity on the long side. 

Traders can look to enter a new long position on or about August 18 and hold this position until about September 4.

The trade usually ends right around Labor Day, but coffee prices can continue to head higher as they did last year.

This trade has worked 27 times in the last 41 years, for a success rate of 65.9%. After posting a gain every year from 1986 to 1997, this trade has had a spotty record of late, successful in just nine of the last 17 years.

Coffee has increased in popularity on an international scale in the last few decades. Most consumption has been from the United States, parts of Europe, and Canada.

Many Europeans have switched from tea to coffee, and with the introduction in late 2005 of Starbucks coffee in Europe and in Asia, demand is improving, especially for higher grade and quality coffee.

With increasing global consumption habits, if there are threats of supply disruptions or production declines for higher-grade coffee, the futures market can be prone to extreme price moves.

Coffee was the top-performing commodity in 2014 as weather and disease combined to threaten supplies.

Those concerns eased in October last year and coffee’s price has been falling since and is currently trading right around its 52-week low, which is not far above its multi-year lows touched in November of 2013.

A strong US dollar and a weak Brazilian real (top coffee producer and exporter) are also keeping coffee’s price in check for now, so this time around coffee’s seasonal move higher could be muted.

Outside of the futures market several choices exist to trade coffee’s seasonal move. iPath DJ-UBS Coffee Sub-Idx TR ETN (JO) is the top choice.

Unlike an exchange-traded fund, JO is an exchange-traded note that is designed to track the DJ-UBS Coffee Sub-index Total Return, which reflects the potential returns available through an unleveraged investment in futures contracts on coffee.

JO has sufficient liquidity trading around 160,000 shares per day over the past three months with a market capitalization of right around $100 million.

A long position in JO could be considered on dips below $20.60. If purchased, a stop loss at $19.10 is suggested.

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