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The Canary in the Commodity Coal Mine

By Jeff Clark
Tuesday, July 3, 2012

Rising prices aren't a problem... at least, according to the government folks who keep track of such things.
 
The Consumer Price Index is muddling along at a turtle-like pace below 2% per year. So inflation isn't a problem. "We have it all under control," Federal Reserve Chairman Ben Bernanke and his followers proclaim.
 
But yesterday, I paid $4.99 for a small box of Lucky Charms cereal...
 
I do most of the grocery shopping for my family. So I'm keenly aware of the trend in food prices. And I can't ever recall dropping $5 for an 11.5-ounce box of my kids' favorite breakfast cereal.
 
It shouldn't be much of a surprise, really. Commodity prices have been rocketing higher over the past month. Soybean prices jumped 5% in June. Wheat and corn were up 20% and 22%, respectively.
 
Those are pretty significant price hikes... But they're not out of line with historical trends. Food commodity prices are volatile, and 10%-20% moves are common.
 
So it would be easy to dismiss the magically delicious price-gouging of a box of Lucky Charms if it wasn't for one thing... the rising price of sugar.
 
Sugar is the canary in the commodity sector coal mine. It's a purer measure of price inflation or deflation. Sugar crops aren't as vulnerable to weather disruptions such as droughts or floods. So the supply versus demand equation is more stable than that of most other food commodities.
 
We can dismiss the short-term price volatility of stuff like wheat and corn. But we ought to pay attention to the price of sugar. It'll provide an early warning sign for food price inflation. And based on the following chart, things don't look good...
 
 
Sugar broke out to the upside of a bullish falling-wedge pattern (the blue lines) in early June. But after a 20% pop higher last month, sugar looks poised to break to the upside of an ascending-triangle pattern (the red lines).
 
This is a bullish combination of patterns that often occurs at the end of long-term downtrends. A move above $0.215 would be a clean break out, and it would signal the start of a new uptrend for the price of sugar.
 
As sugar moves higher, you can count on most other commodities to do the same. That's going to hurt your wallet at the grocery store... And it's going to hurt the profit margins of restaurants and food-service companies that don't pass the price increases onto consumers.
 
There aren't many pure plays to trade the sugar trend. You could buy an exchange-traded product – like SGG or CANE – but they trade off futures contracts, which present a whole new list of risks.
 
More aggressive traders might also consider shorting restaurant stocks as rising food costs will eat into their bottom lines.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

Back in April, Larsen Kusick pointed out food prices have more than doubled over the last decade. And after one commodity sector got crushed, Larsen told Growth Stock Wire readers to pay attention.
 
If these stocks recover just half of their losses from their 2011 highs, Larsen believes we could see 20%-40% gains this summer. In the last month, shares of the two companies he recommended are up 20% and 18%. Get the full story here: An Update on a Classic "Boom and Bust" Sector.

In The Daily Crux
Market Notes
"Stealth" biotech uptrend accelerates... XBI and IBB funds surge to fresh all-time highs.  
 
Credit card giant Visa breaks out to a new all-time high.  
 
Big gold stock fund GDX is building a new uptrend... up 14% since bottoming in mid-May.  
 
U.S. automakers are still struggling... Ford and GM both sink 25% over the past three months due to slow U.S. sales.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1365.51 +0.3% +1.9%
Oil (USO) 31.43 -1.3% -15.4%
Gold (GLD) 155.09 -0.1% +7.0%
Silver (SLV) 26.73 +0.3% -19.0%
U.S. Dollar 81.88 +0.4% +10.1%
Euro 1.26 -0.4% -13.3%
Volatility (^VIX) 16.80 -1.6% +5.9%
Gold Stocks (^HUI) 427.29 -0.1% -16.7%
10-Year Yield 1.58 -4.8% -50.6%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 136.51 +0.3% +4.1%
Singapore (EWS) 12.39 +0.6% -7.1%
S. Africa (EZA) 63.99 +0.1% -7.6%
Japan (EWJ) 9.38 -0.3% -8.9%
Canada (EWC) 25.95 +0.4% -16.8%
Taiwan (EWT) 12.23 +0.0% -17.1%
S. Korea (EWY) 54.24 -1.0% -17.3%
Lat.America (ILF) 41.74 +0.7% -17.7%
China (FXI) 33.65 -0.1% -20.2%
Israel (ISL) 12.45 -0.3% -22.7%
India (IFN) 20.35 -0.2% -30.4%
Russia (TRF) 13.84 +0.1% -36.3%

Sector ETFs
Symbol Price
Change
52-Wk
Retail (PMR) 24.45 -0.2% +14.5%
Utilities (XLU) 37.22 +0.6% +13.3%
Big Tech (QQQQ) 64.35 +0.3% +12.2%
Consumer Svcs (IYC) 81.69 +0.6% +11.4%
Real Estate (IYR) 64.62 +1.1% +9.4%
Health Care (IYH) 79.86 +0.5% +8.8%
Biotech (PBE) 23.90 +3.0% +5.5%
Construction (PKB) 13.82 +0.4% +3.4%
Oil Service (OIH) 35.70 +0.2% +0.0%
Big Pharma (PPH) 39.01 +0.6% +0.0%
Software (PSJ) 26.65 +0.6% -0.9%
Financials (IYF) 55.67 +0.7% -1.1%
Media (PBS) 14.94 +1.7% -2.1%
Insurance (PIC) 15.89 -0.1% -2.7%
Industrials (IYJ) 67.71 -0.3% -3.6%
Transportation (IYT) 93.23 -0.1% -5.5%
Water (PHO) 18.26 +0.7% -6.2%
Telecom (IYZ) 22.86 +1.7% -6.8%
Defense (PPA) 18.94 -0.4% -7.4%
Semis (PSI) 14.51 -0.2% -15.1%
Basic Mat (IYM) 64.45 -0.4% -17.5%
Nanotech (PXN) 6.60 +0.9% -23.5%
Alt. Energy (PBW) 4.52 +2.3% -47.8%

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