Since mid-2011, the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (NYSEArca: JO) has fallen harder than a coffee addict crashing after a caffeine high.
Yet on Wednesday, JO bounced 4% from near all-time lows. Futures traders have grown extremely bearish on this poor-performing sector, so the rally may have legs if they are forced to cover their short positions, analysts say.
The exchange traded note is designed to track an index of coffee futures, and has a market capitalization of $44 million, according to issuer Barclays. The bank also manages iPath Pure Beta Coffee ETN (NYSEArca: CAFE), which only holds about $2 million.
Traders turned extremely bearish on coffee this month as JO fell to a multiyear low. The coffee ETN is still down about 40% year to date even with this week’s bounce.
“Short sellers apparently have been paying attention since there is currently a record net short position held in coffee futures and options tied to coffee,” said Paul Weisbruch at Street One Financial. “However, like anything that attracts heavy short interest, any sign of the reversal of weakness often causes exaggerated moves to the upside given the pent up buying pressure that may exist for those shorts looking to protect profits.” [Coffee ETF Falls to Multiyear Low as Shorts Pile On]
Kimble Charting Solutions notes that sentiment readings on coffee indicate only 15% bulls, one of the lowest levels in years. This is the reverse situation of 2011 when coffee prices topped out after a two-year rally and a 200% gain. At the 2011 peak, coffee sentiment was 90% bullish.
“The bulls formed a crowded trade in coffee 18 months ago and got creamed,” Kimble said. “Have the bears formed a crowded trade and about to get creamed too?”
iPath Dow Jones-UBS Coffee Subindex Total Return ETN