As featured in the recently released Seasonal Sector Trades: 2014 Q1 Strategies, cocoa tends to begin a seasonal decline in early to mid-March through the end of May (shaded in yellow below), instituting a short position in our seasonal best-trade category. Selling on or about March 14, right before St. Patrick’s Day and holding until on or about April 16, for an average holding period of 23 trading days, has been a winner 31 of the past 41 years. Even in the face of the 2008 great commodity bull-run, this seasonal tendency worked with a potential profit per contract of $1,730. Since 1997, this trade has only posted two losses.
Cocoa has two main crop seasons. The main crop from the Ivory Coast and Ghana in Africa, accounts for 75% of the world production and runs from January through March. As inventories are placed on the market, this has a tendency to depress prices, especially when demand starts to fall for hot chocolate drinks and chocolate candy in the spring and summer time. Strong demand for chocolate, especially in Asia, has caused cocoa prices to surge nearly 50% from its March 2013 low just above $2000 per metric ton to nearly $3000 per metric ton as supply lags demand. About 10% of this move happened over the past month and cocoa’s momentum has stalled with technical indicators signaling overbought conditions just ahead of typical seasonal weakness.
Futures traders could consider an outright short position or bearish option strategy using the July contract to take advantage of this setup. Stock and ETF traders could try to short iPath Pure Beta Cocoa ETN (CHOC) however; it is not that liquid with just a few thousand shares, on average, trading hands over the past three months. Click here to learn more about the Stock Trader’s Almanac as well as this story.