Cleveland: Curb Your Enthusiasm as We Approach Cotton's Magic Number

By Jim.Robinson|March 19, 2013

You recall that first cigar you got your Dad to let you smoke…and your face turned green and stomach hurt for two hours. Up, Up and Away is still being played, but I well remember that first cigar. The market will take a break shortly. It is the ole story “too much, too quick” and is in danger of turning green.

Yet, there remain bullish signals and a list of reasons why old crop will climb above 95 cents and approach that magic number. Merchants have been short throughout this rally, all the way back to October and longer. They remain dreadfully short, but finally gave up this week and actually exited some positions. They defended as long as they could. There are simply not any sellers left in the market. Everyone is a buyer. Likely, the Chinese have also given up any hedging ideas and are just sitting back smiling as the world cotton price begins to approach the “investment price” they paid for their strategic stocks. However, given that “investment price,” the New York ICE contract still has a price marathon to run to even approach the $1.37 per pound they paid their growers this year. Old crop is not going to reach that level, not even close. Maybe the May-July will reach the magic dollar, but I will not have any left. Yet, for those few that have some 2012 crop left it is in high demand and will creep higher. Yet, the market will likely become most volatile and while the momentum calls for higher prices, there will be some limit down days in the near future.

Mill Call Sales, now there is a phrase we have not really discussed since 2010/11. Today, Call Sales are very similar to that 2010/11 time period and suggest prices will continue to climb. The weekly call sales report has well predicted the current rally and still points toward higher prices. However, with few sellers left in the market and fund managers with both pockets full of cotton, speculative profits are now looking to bank those profits and exit the market.

Open interest in the cotton market has exploded during the recent weeks and continues to grow. With the market advancing the only and simple meaning is that large funds have been heavy investors (buyers) in the cotton ring. Watch the daily open interest. Not if, but when, open interest begins to fall and the market falls at the same time, then we will know that the funds are taking profits and prices will fall. You can be about 99.9 % sure of that.

Yet, I do not want to pour cold water on the bulls. I have been in that camp since August 2012. You could just see that the Chinese were taking cotton off the market back then. The Chinese would love to see prices advance because the higher cotton prices advance the more defensible their domestic policy of keeping cotton off the market becomes. They are looking good now, and should New York advance another 1000 to 1500 points then they will look like Jedi Masters and all the Super Heroes rolled into one.