I noted in last nightΆs comments that USDAΆs NASS had issued the weekly crop progress and crop condition report and that the portion of the cotton crop rated good to excellent rose 3 points to 46% in the most recent reporting week; up from 41% a year ago. I also noted the portion of the crop rated poor to very poor declined 2 pts, to 23%; down from last yearΆs 30% in that category.
WELL! You sure wouldnΆt think such modest improvement would justify a 400-point drop in futures, but thatΆs what we got when the speculative funds started selling. Like hungry sharks that hadnΆt smelled blood in awhile, these Funds started piling on long cotton positions two weeks ago when futures suddenly and inexplicably punched through overhead chart resistance just under the 90 cent mark.
By last Friday, when the CFTC put out their weekly Comittments of Traders Report, these funds had accumulated, collectively, a record 87,179 contracts and the number of individual fund entities reporting cotton positions had risen to 112, the largest since August of 2010 when it exceeded 120 for two weeks.
YesterdayΆs weaker close, in hindsight, was a “hint” of what was about to happen because it was casually blamed on “declining interest in the long side by trading funds” on wire service reports.
In a CLASSIC display of the “herd instinct” that often grips futures trading pits, that little bit of improvement in crop conditions, combined with reports of “lower interest by funds” in buying more cotton, triggered enough fund liquidation today to start a stampede for the exits.
My view is that current sales levels are about right for where we are in the fundamentals and the outlook at present. The only advice change IΆm making tonight is to withdraw advice for “catch-up” sales. This was the first limit-down day in cotton since June of last year. Mills that were short-bought surely must have been very nervous the past couple of weeks.
My suspicion is that we will see mills jump in and cover pretty aggressively if thereΆs follow-through selling in cotton futures tomorrow. They will believe they “dodged a bullet” and are getting a second chance to get covered into 4th quarter. There may even be some small specs who see a big collapse like this as a second chance to get on board the long side. Just hold off catch-up sales for those reasons.
