NY futures extended their rally this week, as December gained another 254 points to close at 91.79 cents, while March advanced 183 points to close at 88.96 cents.
Speculators and the trade continued to beef up their already impressive positions this week, as open interest kept increasing at a mindboggling pace. Since the beginning of July, open interest has gone from 156Ά479 to 206Ά687 contracts, an increase of over 50Ά000 lots or 5.0 million bales.
WhatΆs even more impressive is the jump of 31Ά652 contracts since last Wednesday, which is one of the steepest advances ever. The only other time we saw open interest rise as fast was in late February 2008, when it increased 43Ά394 contracts in just ten sessions, setting up the epic short-covering rally of early March 2008.
Will history repeat itself as it so often does? There are definitely some interesting parallels between now and March 2008. In both instances the rally was driven by strong spec buying, with the cash market lagging behind, unlike in 2010/11, when the cash market was leading the futures market higher.
The main difference between now and 2008 seems to be the tradeΆs resolve and improved financial capability to withstand this onslaught of spec buying. Five years ago some members of the trade were simply pushed over the edge, unable to meet margin calls, especially after the exchange demanded margin payments based on much higher ΅syntheticΆ futures values. ThatΆs not the case today and even though the trade net short position is currently at an impressive 16-17 million bales, it is still quite a bit below the 24 million bales back in early 2008.
On the other hand the spec net long position (large and small specs) is once again approaching rather elevated levels at an estimated 9 to 10 million bales. At the end of February 2008 the specs had amassed a net long position of 11.5 million, before it was eventually absorbed by panic trade short covering in subsequent weeks.
For now both the specs and the trade seem to be digging in, increasing the stakes session after session like two determined poker players. Who is going to blink first? In trying to answer this question, we need to put ourselves in the shoes of a spec long and a trade short and figure out what motivates them!
Speculators have been considerably net long (between 5 and 10 million bales) ever since February and we guess that their average price is somewhere near 83 to 84 cents. With December at almost 92 cents, speculators have some nice profits on their books, which they are going to protect. Since the majority of these speculators are technical traders and therefore trend followers, they will stay in a trend until it reverses. Although the uptrend is alive and well, the most recent ascent may have been a bit too steep and momentum indicators such as the RSI or Stochastic are currently flashing overbought conditions. This suggests that we could see a pullback and some profit taking in the days ahead.
From a tradeΆs perspective the futures market has once again pulled ahead of the cash market by some 5 or 6 cents and traders seem to have no reason to abandon their short position at the current time. Also, these higher prices are presenting growers in the Southern Hemisphere with a great opportunity to lock in profitable levels as they head towards their planting window, which explains some of the additional shorts the trade has put on recently.
The biggest concern we have in regards to this large trade short position is the US crop, which seems to be getting smaller and probably has some quality issues due to the wet and cool conditions in the Mid-South and Southeast this season. Any further deterioration of the US crop could spark some panic among traders, which wouldnΆt be pretty considering that we have a record open interest for this date in December at 166Ά457 contracts. Unfortunately the just released Accuweather forecast for Fall 2013 doesnΆt look very reassuring, since it calls for flood woes in the Southeast to continue and for severe storms to linger in the Mid-South.
So where do we go from here? After the market has broken above the upper band of a six-month sideways range this week, it is now challenging important resistance areas on the weekly chart, the 93.93 cents high, which was set in March and the 92.58 cents high that was posted in June. A break above these levels would probably spark another round of spec buying and possibly some trade short covering. However, failing to supply this bull market with additional buying in the days ahead may stall momentum and force prices to retreat. The specs have already spent a lot of bullets to get the market above 90 cents and while they may be able to commit additional funds to their cause, they ultimately depend on the trade to take the market higher from here, but unlike in 2008 the trade may not oblige this time around.
Best Regards
