We’ve been bullish on emerging markets – Brazil in particular – all year long. Now we’ve got another reason to love Brazil – the coffee.
We first started writing about Brazil back in December of 2016 when EWZ, the iShares ETF for Brazil, had just bounced out of the Stock State Indicator (SSI) Yellow Zone at around $33 per share.
We rang the bullish bell again in May of 2017 when Brazil dropped 16% in a day. As most investors were running for the exits, we told you it was your second chance to buy Brazil in the mid–$30 range.
This week EWZ broke out to two year highs above $40. The trend is up. The SSI is Green and the buzz is starting to build around Brazil.
In addition to the new highs in EWZ, it’s looking like the coffee market could soon add another jolt to the Brazil bull story.
As with many commodities, coffee has seen its price fall dramatically over the past few years. Just three years ago, coffee traded above $2.20/lb. The volume–at–price chart shows you that it’s been stuck in a range between $1.15 and $1.40 for the majority of the past 2–1/2 years.
So why do we think that coffee could soon break out of this range? The smart money in coffee is bullish and the time–cycles are pointing higher.
The commercial traders are the “smart money”. Many of these traders are the actual coffee growers themselves. They’ll hedge their crop when they believe the prices have topped.
You can see in the chart below that there is a negative correlation between the commercial traders and the price of coffee. Commercial traders get more and more bullish near bottoms in the price of coffee.
When their net positions get above the zero line, it’s a very powerful indicator of higher prices ahead. When this happened in late 2013, coffee shot up and more than doubled in just a few months. In 2015, the price rose by almost 50% in a short time.
Our time–cycle forecast also supports this bullish case for coffee. The 1.8 year cycle is a very strong cycle and it’s showing that coffee could rise into late April next year.
Why does this matter? Because the price of coffee is positively correlated to the price of EWZ. They tend to move up and down together. If coffee moves higher, that will help give another boost to EWZ.
Some people might question why we’re still interested in a stock that’s already trading at a 52–week high. That’s an easy one. Stocks that are trending higher have a history of continuing to trend higher.
And EWZ isn’t even close to its all–time high around $74 which occurred right before the financial crisis 9 years ago.
EWZ is a high–risk stock with a Volatility Quotient (VQ) just above 30%. It might not fit into more conservative portfolios. But for someone looking for an ETF that could benefit from a little caffeine boost, EWZ is worth a look.
And if you want to consider adding a little coffee to your portfolio, you can check out JO, the iPath ETN for coffee. Just keep in mind that coffee is a thinly traded market. The current VQ on JO is 26.2%.
Have a wonderful weekend,
Richard Smith, PhD
CEO & Founder, TradeStops