Folks have gotten used to watching commodities soar over the past few years...
Lumber skyrocketed hundreds of percent... Oil jumped above $100 a barrel... And even cotton climbed to a decade-plus high.
Today, we're seeing the flip side, though. Prices are coming down. And inflation is falling with them. So most folks have stopped caring as much about commodity investments.
They're making a mistake, though. That's because the rapid declines have led to some rare opportunities.
Coffee is one of them. Prices crashed recently. Traders absolutely hate the commodity... And according to history, that means a major rally is on the way.
Let me explain...
I doubt you noticed... But the price of coffee went into freefall over the past year.
The commodity peaked almost exactly a year ago. Then, it fell more than 40% from that 2022 high through the recent low.
Of course, when traders see that kind of fall, they all tend to flee in unison. That can last for a while. But eventually, sentiment hits unsustainable levels... And that's when a reversal becomes likely.
This is what's starting to happen in the coffee market today. We can see it in the Commitment of Traders ("COT") report for coffee.
The COT is a weekly report that shows us what futures traders are doing with their money. And today, after coffee's sustained fall, they're bearish. Take a look...
The COT shows a major reversal over the past year. Speculators were darn bullish at the start of 2022, right as coffee prices peaked. But then, prices tanked – along with sentiment.
You can see that traders are the most bearish they've been in years. Unfortunately for them, these folks tend to get it wrong when they're either extremely bullish or bearish. And similar bearish setups have been starting points for major rallies in coffee...
For instance, coffee was ending a multiyear fall in late 2013. But just as the COT neared a multiyear bearish level, prices reversed... And coffee nearly doubled in less than six months.
It was a similar story in late 2015. The commodity had fallen for roughly a year. But eventually, sentiment became too sour. And that spurred a 50%-plus rally over the next year.
Finally, we saw the lowest sentiment reading on record in 2018. It took a while for that to affect prices – coffee went sideways for nearly two years. But then, the commodity took off... nearly tripling in a year and a half.
Today, we're seeing a similar setup. Futures traders are betting against coffee to a rare level. And in the past, that has always happened near a bottom in prices.
The turnaround may be starting already... Prices have soared roughly 35% from their low last month. And history shows the rally in this beaten-down commodity will likely continue.
Good investing,
Brett Eversole
Further Reading
"Folks who are bailing on natural gas may be getting ahead of themselves," Sean Michael Cummings explains. This commodity has crashed since August. But according to one signal, the plunge is likely overdone – and prices could be about to reverse... Read more here.
"We just finished a stellar January," Brett writes. Investors are still fearful today. But last month's rally was the best kickoff to the year since 2019. And history shows that's a good sign for the months ahead... Learn more here.
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