Traders are sending out a warning signal…
They don’t realize they’re doing it. Instead, these traders are giddy about making piles of money on one trend. Yet the fact that these speculators are betting in unison is a sign of trouble.
You see, a certain batch of traders is betting on one commodity to roar higher. And when that happens, it’s often a sign that big losses are on the way.
History shows us we could see a 60% crash from here. And that means this is one area of the market you want nothing to do with right now.
Let me explain…
As contrarian investors, we always want to keep an eye on the crowd. When a big swath of investors is all making the same bet, it means there might not be any buyers left. And that’s a sure sign prices are nearing a peak.
Today, we’re seeing extreme bullishness toward sugar in the futures market. We can see this through the Commitment of Traders (“COT”) report for this commodity.
The COT report gives us a glimpse into what futures traders are betting on in real time. It’s an effective contrarian indicator at extremes.
For example, when futures traders are all betting on an asset to move in one direction, the opposite tends to occur.
Today, futures traders are betting on higher sugar prices. Take a look…
Sugar prices might not be something you think about often. But they’re up 69% over the last year. And that has got investors excited.
The chart shows futures traders piling into the trade on the way up. Now, bullish bets are hovering around all-time highs.
These folks tend to get it wrong when they make extreme bets like we’re seeing today. Similar bullish cases in this commodity have led to devastating losses.
The table below shows how these setups have played out in the past…
The last four times traders were “all in” on sugar, prices crashed.
The largest drop came during the financial crisis. The commodity fell 60% in a year. And the other drops were nearly as painful.
We saw another 27% dip following the 2009 setup… a 57% drop in 2013… and a 49% fall within a year after the sentiment setup in 2016. These are huge losses that could wipe out your portfolio. And they show that tracking sentiment is key when investing.
Simply put, futures traders are all-in on higher sugar prices. But history shows following their lead can yield terrible results.
With bullish sentiment near all-time highs, sugar could be on the verge of collapse. And that makes it a commodity to avoid for now.
Good investing,
— Chris Igou
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Source: Daily Wealth