Seasonal Sector Trades: Cocoa and British Pound
By: Jeffrey A. Hirsch & Christopher Mistal
March 08, 2018
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 17, for an average holding period of 23 trading days, has been a winner in 34 of the past 45 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. 
[March Short Cocoa (July) Trade History]
[Cocoa (CC) Weekly Bars (Pit Plus Electronic) and 1-Yr Seasonal Pattern]
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. For most of last year, cocoa was essentially stuck in a trading range from around $1800 to $2200. 
Cocoa broke out of this range, in dramatic fashion, just last week. Cocoa’s current run began in late December near the bottom end of its range and is now near $2500. A strong factor for the brisk run up has been unfavorable weather conditions in major growing areas in Ivory Coast (Côte d'Ivoire) and Ghana. Cocoa is now heavily overbought and sentiment is heavily bullish. These two conditions can result in a pullback or correction for cocoa in the near-term.
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 three thousand shares, on average, over the past three months and NIB was around 100,000. 
Another possibility, with plenty of liquidity is Hershey Foods (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 has sold off this year. HSY was near $115 per share in late-December, traded as low as $95.21 in February and is currently trading right around $99 per share. HSY could be considered on dips below $98.75. If purchased a stop loss of $94.50 is suggested. HSY will be tracked in the Almanac Investor Large-Cap Portfolio.
[Hershey Foods (HSY) Daily Bar Chart]
British Pound Rally
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 42-year history of this futures-based trade, it has been positive 30 times for a success rate of 71.4%.
[March Long British Pound (June) Trade History]
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 15 wins in 18 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.
[British Pound (BP) Weekly Bars (Pit Plus Electronic) and 1-Yr Seasonal Pattern]
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 $195 million equivalent U.S., but average daily trading volume could be better than the current 50,000 over the past 30 days. FXB could be considered on dips below $134.00. If purchased a stop loss at $130.00 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.
[CurrencyShares British pound (FXB) Daily Bar Chart]