Hobofinance.com

Ok, it’s about time for the second entry in what is to be an empirical Hobofinance case study testing the veracity of Hobofinance philosophy. It will last about 8 months or so, depending on the performance of the coffee market. We’re into the second week of August 2008 and the time is damn close if not currently here for coffee to bottom out. The seasonal tendency of coffee toward weakness in June, July, and August was questionably consistent this year (no sharp decline in June or July though), with the exception of a two week explosive rally that went nowhere in late June. And I’m glad it didn’t because I hadn’t yet established a position.

When buying for the long haul there’s an overwhelming temptation to try to pick the bottom. As stupid as that is, I also have that urge to maximize gains by timing the market. But what timing indicator do we have that will tell us conclusively the bottom of a market year on year? None that I know of. There are some that come close: the MACD histogram, the Relative Strength index, and Williams% R which, in conjunction, all give a pretty good indication of major market shifts. My personal favorite is to follow the position of commercial traders as an indication of what buyers and sellers who intend to sell or take possession of the physical commodity feel is a relative level of value.

What makes me nervous this August is that, although the coffee seasonality is turning positive, commercial traders are not yet net long the market. Commercial traders have been net long coffee at least one time each year for the past 4 years between May and August. This year that pattern has not surfaced and is room for short term concern, as they may not yet feel prices have fallen low enough to start accumulating inventory for the coming season. And if users don’t need to buy, why should we?

Well, I don’t know. But what I do know is that coffee has been establishing a base for the last 4 months and that the Brazilian harvest is nearing its end, which is cause enough for a seasonal low. And despite the fact that commercial traders are not yet net long, their net short position has contracted by about 50 percent along with open interest since March. Coffee prices have also been much higher at some point between December and March of the last 4 years than they were in the preceding August. So those factors provide me with fundamental justification to enter a long term position, regardless of whether or not a definitive bottom is in. I’m buying what I consider to be relative weakness in price. I’ll be buying call options in order to ride this market for the long haul without fear of temporary and potentially sharp corrections downward. My orders are currently in and unfilled, focusing on March and July call options. I’ll disclose both my position and management strategy in the next entry after my position is set.