Don't Bet on This Overly-Loved Drug

More than 50% of U.S. adults count on this drug every day.

It might snap you awake in the morning... or pick you up in the afternoon. And it has few negative side effects for most folks.

But today, traders are taking their love for this drug too far. They're betting it will soar from here. In fact, these futures traders are making near-record bullish bets on it as I write.

This type of love is dangerous in investing. And as we will see today, it could lead to big losses for these traders.

Let me explain...

One of the world's most commonly used (and darn addictive) drugs is caffeine. And coffee is our favorite way to get it.

It's what drives most of us through our daily lives. And I completely get the love for it. Aside from water, tea and coffee are the top two most-consumed beverages in the world (yes, even more than beer).

Here's the thing... While I understand the love for coffee, you need to be careful when showing extreme love in the markets. That's where traders often go wrong...

Today, traders are showing their love for coffee in the futures market – in a big way. We can see this through the Commitment of Traders ("COT") report for coffee.

The weekly survey gives us an inside look at what futures traders are doing with their money in real time. And when futures traders are all betting in one direction, the opposite typically occurs. It's a wonderful contrarian indicator.

These days, traders are "all in" on one of the most beloved caffeinated drinks in the world. Take a look...

We've only seen levels this bullish a handful of times since 2010. And each case led to poor performance in coffee prices over the next few months.

Take 2011, for example... Coffee prices were on an absolute tear in 2010. And by early 2011, futures traders were jumping in headfirst.

These traders were all buying in a big way. Then, coffee prices tanked for the next couple of years... And one of the world's most precious caffeinated drinks dropped more than 80% in price from May 2011 through November 2013.

That's a beating that's hard to come back from. But futures traders didn't learn their lesson...

In 2014, we saw a similar story play out. By mid-October 2014, coffee was up nearly 100%. With such an impressive rally, futures traders were scared to miss out on even higher prices.

These traders were "all in" again by November. And you can guess what happened next. Coffee prices fell 62% from their October highs into January 2016. Ouch.

The last time this happened wasn't any better. Futures traders made big bets on coffee in late 2016. And once again, the price fell 80% in a little more than two years.

Now, we are seeing near-record bets on higher coffee prices once again. Don't make the same mistake these futures traders have made for years... A major crash is likely on the way.

Good investing,

Chris Igou

Further Reading

"You should always be a little scared of consensus," C. Scott Garliss writes. When everyone piles into the same side of a trade, it tends to go against them. No matter whether investors are bearish or bullish, you can usually benefit by going against the grain... Read the full story right here.

Investor fear is often a contrarian indicator. And while folks are terrified of another crash today, history suggests that it could be lucrative to bet against it... Get the full story here: Why Stocks Could Rally 20% From Here.

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Unlike coffee, investors want nothing to do with one of the U.S.'s largest stock indexes. And this extreme bearishness could send prices much higher from here...

Market Notes


Today, we're checking in on a successful "boring" business...

Regular readers know it pays to invest in businesses like pest control and uniforms. These companies have been doing the same thing for decades – and do it well. They may not be exciting... But they can help you take advantage of steady, stable growth, with less risk if markets crash. Today's company is a perfect example...

Sherwin-Williams (SHW) is a $65 billion paint manufacturer. Selling paint may not make headlines, but it delivers solid results. In the first six months of the year, Sherwin-Williams' sales only fell 1.9%, despite headwinds from the coronavirus. CEO John Morikis said the company had seen "unprecedented demand" from customers looking for do-it-yourself projects... driving a 21% gain in North American retail sales during the second quarter.

As you can see in today's chart, shares of SHW are ripping higher. The stock is up more than 80% from its March lows, and it recently hit a fresh all-time high. It's yet another example of the power of investing in "boring" businesses...