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Breadbox Rotation

6/29/2015

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The equity and bond markets could be in a long process of topping out. I have discussed my reasoning for this thesis quite extensively in previous posts. I have been thinking this for quite some time now but quite frankly trying to short stocks has repeatedly beat me up. As it turns out, It's much harder making money as a bear than a bull. Shorting for extended periods of time, your gains are limited and the threat of ruinous short squeezes is very real and frightening. 
I'm at the stage of my trading career where I'm just not all that interested in trading individual stocks anymore. There is already so much risk and uncertainty in markets, I really have no desire to ramp up my risk exponentially by trying to game individual stocks: Especially illiquid little small caps where manipulative Seeking Alpha articles have the power to make or break them. I will however game macro markets and sectors as a whole. When you look at the big picture, perhaps it becomes a little easier to see which tides are rising and falling...
The micro components that compose a sector bounce around a lot. Gaming any one piece can be difficult but by examining what they are doing we can begin to see trends emerge. Money is never static, it is always moving. Money constantly flows from one area to another. This market is a zero sum game. Money never leaves, it just sloshes around. There is always a buyer and a seller, a winner and a loser. When you take from something, something else gains. The task of a trader is to dig deep, examine the puzzle, attempt to determine how the money is flowing, properly position, capitalize on the rotation, and re-position when the tide begins to shift.
I have this thesis.. I have been focusing so hard on where money will be flowing out of (namely stocks and bonds) I was certainly early in my thinking, I was trying to beat the crowds, but I was too early. Timing is everything in this business. It is good to be ahead of the herd, but being too early and you may find yourself under the hooves of a thousand raging bulls... It's finally happening though. As this chart illustrates, money is beginning to trickle out of stocks and bonds...
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I could've traded it better but so far my predictions are beginning to look spot on!
Ok, so we know where money is floating out of, but that is only one piece of the puzzle. As I have learned it's just hard as hell making money as a bear so let's now focus on perhaps the more important question. Where is money going to flow into?   Well stocks are bloated, bonds are at extreme risk of systemic shock if rates begin rising too aggressively. This leaves us with one major asset class for money to flow into. Currently the most hated and despised asset class on the planet: Commodities.
The thing is, just like stocks, not all commodities are created equal. They each have their own individual driving factors and unique supply/demand paradigms. I am not bullish on oil for instance because of how closely tied to the dollar it is and how the oversupply issue seems to be increasing every week. 

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However, there are a few more promising commodity complexes that I think are worth a look. Specifically I am talking about the Soft Commodity & Grain Complex.
In my previous post I have shown you the leader of the pack: Cocoa:A Hot Commodity. Already in an established uptrend Cocoa is looking great!
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Since my last post Cocoa has broken the bull flag to the upside and continues to push higher!
Cocoa is the undisputed leader of the soft commodity sector but look at the grains coming on strong.
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Wheat could be undergoing a bottoming process.
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Corn has a similar look to Wheat
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Soybeans also above their 200dma
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Recently Short Interest in Sugar was at Record Levels. There is plenty of powder for an epic squeeze!
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Coffee is currently lagging but things can change on a dime when people begin catching on to the Breadbox Rotation
The tides of markets are changing. Just because stocks and bonds may be entering a bear market does not mean that other asset classes cannot thrive. Do yourself a favor and position yourself to be a beneficiary of the Breadbox Rotation!
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    R. J. Sullivan IV

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