ETF Traders Binge On Cocoa, Leave SPY, QQQ Flat


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ETF traders binged on cocoa Tuesday as futures surged to a nine-month high on poor weather and a crop disease spread through the Ivory Coast's main growing regions.

The fungal black pod disease is gaining ground a little more than a month before the 2012-'13 growing season, Reuters reported. No rain has fallen in some of the southern region, while cool temperatures and poor sunshine killed off pods on trees. Ivory Coast is the leading producer, supplying 30% of the world's cocoa beans used to make chocolate.

IPath DJ-UBS Cocoa Subindex Total Return SM Index ETN ( NIB ) soared 4.5% Tuesday to 35.24 a share, after gapping up 3% the prior session. It's vaulted 19% in the past three months vs. 14% for agricultural commodities.

In the futures market, cocoa for September delivery rose 2% to $2,603 a ton Tuesday, a high since November 2011. Spot prices traded north of $3,500 a ton in 2011 when widespread violence left 3,000 dead. Cocoa melted to $2,000 a ton this year.

Cocoa breaking above $2,500 unleashes a new bull run, says Shawn Hackett, president of Hackett Financial Advisors in Boynton Beach, Fla. In a client presentation this month, he cited five reasons why cocoa will remain bullish well into 2013:

1. Strong demand for cocoa powder out of Asia should continue and is very price inelastic.

2. Structural production issues in the Ivory Coast will keep production very constrained until new investments are made in rebuilding the bearing tree population and overall infrastructure.

3. The persistent dry weather in Western Africa has the potential to lower production potential and escalate modest supply global deficits into severe ones.

4. The next 30 days will be a critical time for the key yield-determining phase of their cocoa production.

5. Also political instability in the region has escalated due to the surprise death of Ghanan President John Atta Mills. Political unrest has been a huge bull driver in the past as worries tend to escalate over the availability of future cocoa supplies.

In addition, cocoa trades globally in U.S. dollars. So dollar weakness makes its more expensive. PowerShares DB U.S.Dollar Index Bullish ( UUP ) fell 0.5% Tuesday and slid further below its 200-day moving average, a very bearish development. UUP tracks the greenback against a basket of global currencies. The dollar has been weakening on expectations that the Federal Reserve at its meeting Friday will signal its intension to engage in more quantitative easing to support the economy.

Cocoa Chart Action

NIB has rallied 18% year to date but has fallen 22% the past 12 months. By contrast agricultural commodities gained 4.7% year to date while losing 13% the past year. NIB cleared technical resistance at 35. The next level of price resistance lies at 39. NIB broke above its 200-day moving average in late July and has been trending higher ever since. Its IBD Accumulation-Distribution Rating, which goes from A to E, improved from a low D- to a strong B- over the past three months. That shows institutions turned from heavy sellers into heavy buyers.

PowerShares DB Agriculture Fund ( DBA ), tracks 11 different commodities contracts, holds a 10% weighting in cocoa and a 7.5% weighting in coffee. It rose 0.7% Tuesday, 3.6% year to date while losing 12% in the past 12 months.

Market Overview

In afternoon trade, the major ETFs were mostly flat as traders sat and waited for Fed Chairman Ben Bernanke's speech Friday.

SPDR S&P 500 ( SPY ): +0.04%.

SPDR Dow Jones Industrial Average ( DIA ): +0.01%.

PowerShares QQQ (QQQ), a basket of the 100 largest nonfinancial stocks on the Nasdaq: +0.07%.

IShares MSCI EAFE Index (EFA), tracking developed foreign markets: -0.06%.

IShares MSCI Emerging Markets Index (EEM): -0.09%.

"The current relief rally in global stock markets may still have some upside in coming weeks if the European Central Bank moves to put a lid on borrowing costs for debt-challenged eurozone governments," wrote Ed Yardeni, president of Yardeni Research. "On Friday, Ben Bernanke is likely to repeat his mantra that the Fed is ready to do more if necessary."

Follow Trang Ho on Twitter @TrangHoETFs .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: DBA , DIA , NIB , SPY , UUP

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