As it turns out, directional price movement predictions pertaining to the cotton market are not always correct, or even close to correct. That block of fine print at the bottom of all market publications informing the reader of inherent risks, as well as a disclaimer about the accuracy of the information contained therein, is there for a reason. Our publications contain that block of fine print, too.
I missed the directional call for the week as well as the range. And it was because of a very strong export report that now has nearly everyone involved questioning the validity of the USDAΆs latest US ending stocks estimate of 3M bales.
Looking back at the data and charts, it occurs to us that the sales were conducted almost nonchalantly, if not stealthily. The largest warning sign, other than the front month refusing to approach the 82.00 level, were fixations of on-call sales near 83.50.
There was other positive news this week, as well.
The commitments of traders report evinced that large funds and holders of non-reportable positions, combined, held firm to their net long position W/W, and on-call sales increased appreciably for aggregated months remaining in the current MY. The cotton marketΆs persistent climb continued, despite a strengthening US Dollar Index. All of these seem to be signs that the market is attempting to ration the demand for US cotton.
If the demand-rationing function of the market is to be fulfilled, then the present rally will need to continue, as the average settlement price over the first four days of the sales period to be reported upon next week was only 75 points higher than the sales period associated with this weekΆs report. Over the first three days, it was 11 points lower for the sales period associated with next weekΆs report vs this weekΆs. And, the basis, per the A-Index, and US currency are a bit weaker, too.
There are some concerns with the current rally, as well. The front month has not led the charge and remains at a partial carry to May 14, which is not typical with the accumulated gains that have been garnered over the past 37 trading days, and especially over the past week. Certificated stocks are again being pledged to the board, although the pace of accumulation is languid. And, it seems that the speculative sector has accrued some nice paper profits; with each failed attempt to push the market higher (i.e. todayΆs failure to either challenge 87.62 or trade decisively above 87.00) the likelihood of profit-taking increases.
Also, over 60% of the net sales reported this week were of the on-call variety, and thus subject to cancellations. Cancellations on recent US export reports have been near non-existent, but rose to over 50K RBs on this weekΆs report.
Finally, there are, most likely, a few thousand contracts of on-call purchases that remain to be fixed to provide selling pressure against the rally. The latest on-call report listed near 6.3K contracts remaining to be fixed, and we suspect that several fixations have occurred during the interim of the reportΆs lag period.
Our initial technical analysis favors near unchanged to higher prices for the front month, but holiday-shortened next week may be ruled by fundamentals.
Overall, the report load is light next week, but the export and cotton ginnings reports will be disseminated on Friday. If Mar 14 has not retraced significantly at that time and US exports sales and shipments are again strong, Mar 14 will likely close the short week a winner. Throw in a whiff of the US not producing its USDA-expected 13.2M bales and things could get dicey.
If, on the other hand, Mar 14 has retreated, the same type of report(s) could have the market charging northward again, Dec 14 included.
For the week, we will call for potentially volatile conditions while trading a range of 84.75 – 88.25 on the inside or 84.00 – 90.00 on the outside.
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Louis W Rose IV, PhD has worked with cotton as a producer, consultant, analyst and trader. Rose holds degrees in Education, Agriculture, Plant Science and Business (MBA) from AR St Univ, OK St Univ and the Univ of Memphis, respectively. He has held positions with Aon Reinsurance and Cargill Cotton. Rose currently provides analytic services for various clients and media outlets and is the co-founder of Risk Analytics, LLC, producers of The Rose Report, which he authors. For more info on The Rose Report or analytic services, please visit: www.rosecottonreport.com.
