Monday, July 26, 2010
The image at the top of this post is the front page of Sunday's New York Times. At the lower left you will find a story about a hedge fund that apparently has "cornered" the cocoa market. In other words, the fund has bought so much cocoa that any further buying by anyone, in particular by shorts wanting to cover their positions, will send the price way up.
This is the sort of bullish story that you will find when a market is trading at or near its historical high point. Cocoa is in this case no exception to this rule. The monthly bar chart above shows the last 15 years of trading in cocoa futures and indeed the market is trading only a little below its historical high point.
The market cynic might ask why a hedge fund would want it known that it holds an enormous long position in a market and has it cornered. My answer is that that fund wants to sell its position. It wants to scare the shorts into covering and encourage new long positions by people who think this "corner" will push the market much higher.
I conclude that cocoa prices will be a lot lower 12 months from now.