We feel that the market is fairly priced at the current level and that May is probably not far from its “cash equivalent value” at around 7600. Therefore, if takers were to emerge who simply look at the certified stock as a recap to put against export sales, then there is no need for the market to go much lower nor do we need to see full carry.
For several weeks the action has been dictated by spec buying into trade selling. With the bullish momentum fading, specs will probably take a breather, which would allow the market to ease off some more. However, we don’t see the trade chasing the market too far down with their hedge selling.
At the moment we are still seeing a fairly even match between spec buying and trade selling, and until one of these two forces gains the upper hand, the market may not move that much.
After rallying to the 78 cents level earlier this week, the market ran into a wall of trade selling and was forced to pull back to the breakout zone near 7600 (former downtrend line which is now support and 100-day moving average at 76.22). We often see markets test support or resistance before resuming a trend and we shall therefore give the market the benefit of doubt.
Today’s move above key resistance has set the stage for a spec short-covering rally, especially if the breakout is confirmed on the weekly chart tomorrow. A lot of these spec short positions are under water now and since algorithms play an important role in specs’ decision making, we expect the market to shoot higher over the coming sessions, possibly into the low 80s.
What looked like light spec short-covering pushed the market towards a crucial resistance area on Wednesday, where a 9-month downtrend line, the January high and the 100-day moving average are all clustered together just above 7600. Although the market seems to have failed in its latest attempt, even a sideways move will eventually catch some of these resistance points and this would likely trigger a wave of spec buying.
We already talked about the trade’s need to increase its net short position over the coming months. Since the specs and the trade can’t be net sellers at the same time, we need the specs to start covering shorts in order to accommodate the anticipated trade selling.
We still feel that the trade will eventually have to boost its 5.4 million net short in order to manage risk on the net on-call position as well as physical longs in current crop and soon to be planted new crop. By comparison, a year ago the trade was still 15.05 million bales net short at this juncture and two years ago it amounted to 19.59 million bales.
Today’s flash-in-the-pan rally might continue if we get a positive surprise in tomorrow’s export sales release. However, technically were are still in a bearish trend and unless we get a move above 77 cents in May, we are going to treat this as another bear market rally.
Recent reports seemed to tell the market “don’t worry, the pipeline is flush with cotton throughout the season and there is a lot more on the way next season”. This has increased outright pressure and also forced more carry into the market.
We believe that December is currently at the center of the pricing structure and that the other months are mainly a function of their relationship to December. Given the potential for larger US and global crops next season, we see it as difficult for December to rally anytime soon.
The market is currently in a short-term uptrend within the confines of a primary downtrend. It will take a move above this downtrend line, which currently runs through around 76-77 cents, to cancel out bearish forces.
The longer US cotton remains attractively priced, the more cotton will get pushed into export channels, which will eventually tighten the balance sheet to a point at which price rationing starts to occur. We are not quite there yet, but another month or two of strong sales would probably do the trick. Once export sales reports resume, there could be an ‘awe effect’ that might lead to a positive market reaction.
While we feel that the market has solid support at 72-73 cents, we are not quite sure what to make of its upside potential. While today’s break above 74 cents bodes well for a technical rally towards the 7650-7750 resistance area, we doubt that such an advance would be sustainable yet. The US needs to get rid of more low grades over the next couple of months before higher cash prices are warranted, especially in the face of what could be a 20+ million US crop in the making next season.
The market actually makes some sense to us at the moment. At 71-72 cents the futures market gets competition from the cash market and therefore doesn’t need to go any lower. However, when it rises to 73-74 cents, like it has been doing a few times since Christmas, the board becomes the top buyer again and therefore attracts selling by the trade.
The uncertainty surrounding the global financial markets continues to weigh down cotton, as traders are afraid of a substantial slowdown in demand.
There is currently quite a bit of pessimism regarding the global economy and the world’s financial markets. This negative sentiment is not going to change unless we have a resolution to the US/China trade dispute and/or the Fed changes its hawkish stance.
December left the board at around 78 cents, which we feel is in the vicinity of ‘fair value’ for SLM-style cotton today. Since there is such an abundance of SLMs this season, we believe that the NY futures market will be tied to the cash market until the inventory of these SLMs has been greatly reduced at some point in the future.
The abundance of lower US qualities and softer financial markets are keeping a lid on cotton at the moment. However, with crops around the globe not living up to their expectations, both in size and quality, there is currently not much price pressure building. We therefore see no reason for the market to leave its current range of roughly 77-82 cents, which it has occupied since mid-September.
From a fundamental point of view we see no reason for the market to rally. There is plenty of cotton around at the moment and the fact that we have such a large amount of tenderable 41 style cotton should keep a lid on the market. It would help if China were able to come back into the market to absorb some of these lower qualities, which is why traders are keenly awaiting the outcome of the US-China trade talks at the G-20 meeting this weekend.