Seasonal Sector Trades: Bitter Sweet Cocoa & Another Pound Bounce By: Christopher Mistal & Jeffrey A. Hirsch | March 07, 2017 | Email | Print

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 13, 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 in 33 of the past 44 years. Even in the face of the 2008 great commodity bull-run, this seasonal trade worked with a potential profit of $1,730 per contract. Since 1997, this trade has only posted three losses. 

 

 

Cocoa has two main crop seasons. The main crop from the Ivory Coast and Ghana in Africa accounts for approximately 70% 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. Cocoa’s clear trend over the last year has been lower and nearly in a straight line since last August. Sizeable deficits in the 2015-16 harvest that drove prices higher are expected to be filled with sizable surpluses in the current 2016-17 season. 

 

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) or iPath Bloomberg Cocoa ETN (NIB) however; they are not all that liquid. CHOC traded just over four thousand shares, on average, over the past three months and NIB was around 83,000. 

 

Another possibility, with plenty of liquidity is The Hershey Company (HSY). When cocoa prices rise, Hershey’s price tends to decline and the opposite often holds true as well. HSY is also a familiar household name for many. HSY, like much of the broad market, has somewhat stretched valuations. Its trailing P/E ratio (price/earnings) is around 32 and P/S (price/sales) is around 2.2. However, HSY appears to be throwing in the towel on some less profitable global operations and plans to trim costs through workforce cuts. A potentially leaner, more focused company could translate in higher profits and possibly an even larger dividend (currently yields 2.28%). HSY could be considered on dips below $108. If purchased a stop loss of $102 is suggested. HSY will be tracked in the Almanac Investor Large-Cap Portfolio.

 

 

However, even more interesting is Rocky Mountain Chocolate Factory (RMCF). With a market cap around $65 million, this is definitely a small-cap company. They are headquartered in Durango, Colorado and operate as a confectionery franchisor, manufacturer and retail operator. RMCF’s valuation is reasonable with a P/E of 13 and a price-to-sales ratio right around 1.7. Cash on hand and debt are also reasonable. They also pay a respectable dividend (4.27% yield). 

 

 

After surging in mid-January due to impressive earnings, RMCF has retreated and has been consolidating those gains. Recent trading action has turned stochastic, relative strength and MACD indicators modestly positive and the 50- and 200-day moving averages were not violated on a closing basis. RMCF could be considered at current levels with a buy limit of $11.50. If purchased, a stop loss of $9.70 is suggested. This trade will be tracked in the Almanac Investor Small-Cap Portfolio. Falling input costs, reasonably valuation and solid growth prospects make RMCF attractive.

 

 

The British pound has a distinct pattern of doing the opposite of the Euro and Swiss Franc. It has a strong tendency to move up against the U.S. dollar from mid-March through the latter part of April (shaded in yellow below). In fact, in the 41-year history of this futures-based trade, it has been positive 29 times for a success rate of 70.7%.

 

 

Entering on or about March 21, holding a long position for 22 trading days and exiting on or about April 23 has been even more successful in recent years, collecting 14 wins in 17 years since 2000. Perhaps the fact that Britain’s fiscal year begins in April helps to push the pound’s value up against the U.S. dollar, as money moves back overseas. Cross transactions between the pound versus the euro currency and the pound versus the yen may help influence the rise in the pound’s value relative to the U.S. dollar as well.

 

 

Outside of the Forex markets, CurrencyShares British Pound (FXB) is the top choice to execute a trade as its holdings consist entirely of British pounds. Net assets are a touch over $286 million equivalent U.S., but average daily trading volume could be better than the current 70,000 over the past 30 days. Renewed Brexit concerns have FXB trading right around its lifetime lows once again. Great Britain and the pound have been around a long time and survived far worse. The current selloff seems overdone. FXB could be considered on dips below $119.00. If purchased a stop loss at $117.00 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.