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Markets to Watch
Look for opportunities in cotton
The August USDA Crop Production and Supply/Demand report for cotton did not give the bulls or the bears much news but it did fail to raise world cotton consumption figures. As a result, the focus of the cotton market shifted away from following the stock market higher to following the supply trend lower. The weather in Texas has improved significantly in recent weeks, and this has traders believing that production forecasts in future monthly reports will be on the rise. The weekly Cotton Conditions report showed 53% of the crop was rated good/excellent as of Sunday August 16th, up from 50% the previous week and 48% last year. The 10 year average for this time of year is 53%. In Texas, the crop is was rated 43% good to excellent, up from 40% the previous week and above the 10-year average. In Georgia crop ratings improved to 56% good/excellent from 53% the previous week. While cotton crop conditions are right on the USDA 10-year average, the yield estimate is still well under the trend-line going back to 1994 And there is more and more talk of the advancement in seed technology and how this may boost yields further.
The strong stock market into mid-August and the outlook for an expanding world economy helped support commodity markets like cotton, but traders are now second-guessing the outlook for a robust world economy and instead are looking at a slower recovery and sluggish consumer spending into next year. If we see a period of less bullishness on the global economy, a firm US dollar or a setback in energy and other commodity markets, then commercial and speculative long liquidation selling could be significant bearish force for cotton. The USDA has already raised its world cotton consumption forecast for 2009/10 to 112.76 million bales, up from 110.6 million in 2008/09. If the world economy is slow to recover, we may see some adjustments lower. China built a massive reserve of cotton and other commodities during the first half of the year, and expectations for continued strong demand from China in the months ahead are easing.
Trend-following funds built a net long position of nearly 25,000 contracts as of August 11th, which pushed the combined large and small spec net long position to 40,982 contracts. This is in sharp contrast to a net short position of 5,728 contracts as recently as March 17th. This overbought condition suggests to us that long liquidation selling could develop if support levels are violated like they were on August 14th and 17th. Last week the market traded to its highest level since October of 2008. Following that with a lower close on the week (which appeared likely as of this writing) would be a bearish technical development.
Relative strength topped out at lower levels as the market made successive, higher peaks of 63.75 on May 12th (RSI 77.15), 64.98 on June 21st (RSI 76.2) and 65.347 on August 13th (RSI 65.3). This indicates a considerable loss of upside momentum and could help attract new selling this week. If demand news turns even less bullish and the focus shifts even more to the supply side of the equation, the market could see a significant setback into harvest.
If you'd like to receive daily information on the cotton market, click here.
Suggested Trading Strategies:
- Sell December cotton futures at 61.35 with an objective of 56.10. Risk to 62.37.
- Buy a December cotton 60.00 call near 310 points and then sell a December cotton futures contract at the market and also sell a December cotton 56.00 put near 245. Hold the position for a break to 56.10 in the futures, but be ready to buy back the 56.00 put for a gain if the market rallies first.
If you'd like to further discuss these strategies to determine the best execution strategy for you, contact us.
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Industry News
Downtick in Confidence May Result in Quick Technical Balancing
As of this writing the markets appeared to be embracing fears of an extension of the global recession. While the US Unemployment Report for July was much better than expected, that report still showed an ongoing pattern of severe job losses. With the US also recently documenting a disappointing monthly retail sales report and a slight softening of housing starts and permits, and both the US and UK central banks extending quantitative easing efforts, one could suggest that the equity markets into the August highs were indeed putting the cart ahead of the horse. With some markets like copper, cocoa, crude oil and sugar pricing in an impressive economic recovery, it wasn't surprising to see those markets and most other physical commodities come under pressure last week in the face of the latest waning of economic sentiment. However, when the stock market was making its August highs, the spec net long readings in the Commitments of Traders reports did not indicate that the stock index futures were overextended. This suggests that the latest downtick in confidence could result in a quick technical balancing in the stock index futures.
With money market asset balances still holding at very high levels when compared to the levels seen last fall, it is clear that the investing public has more capacity than the US consumer does, and therefore we suspect that the mid August swoon in equity prices will be met with renewed bargain hunting. With many pundits arguing against the July run-up in stock prices and the optimistic views toward the economy, we have to think that the extent of the equity market correction will be limited to typical corrective parameters. Therefore, our pick for coming lows are 964 for the September S&P, 8960 in the September Mini Dow and 1545 in the September NASDAQ.
With the cocoa, copper, crude oil and sugar markets also factoring in what seemed to be a straightaway recovery, the potential for a slight extension of the recession might be cause for some additional corrective action ahead. At least at this point there doesn't seem to be a reason to doubt that a return to growth will be seen before the end of the year, but one might suggest that it would be surprising to see positive growth surface in the 3rd quarter. On the other hand, a slight decline in US mortgage rates off the bounce in Treasuries from the June lows should be beneficial. With US citizens apparently finding the resolve to block the initial attempt to put the government solely in charge of health care, perhaps it's not a stretch now to think that public sentiment could somehow prompt Congress and the Administration to implement other stimulus programs that make some economic sense. While the prior administration had its faults, the stimulus programs they proposed in the wake of the 9/11 disaster took the form of tax credits for equipment purchases. With the success of the "cash for clunkers" program, maybe standard economic thinking is set to come back into vogue in the nation's capital.
Keep a pulse on the industry and access more industry news.
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Do not overstay a good market.
If you do, you are bound to overstay a bad one also.
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