Cleveland: Amid Turmoil, Quality Still Drives the Market

Six of the past eight trading days have seen higher closes, and the two days of lower trading have been near unchanged as noted by the week ending August 21 settlement of only two points lower than the prior day’s settlement – closing at 66.91, basis December.

As predicted, and in line with activity for the year, the market had a bit of a stumble at 67 cents. Expect this to continue with an upward bias, as the more significant price resistance sits at 68 cents. The 68 cent mark will be challenged as the top of the trading range, but, for now, I remain of the opinion that price advancement will stall in the short term near the 68 cent level. However, a push to 70 cents is expected within the next six to seven weeks.

Actually, cotton had a remarkably positive week, considering its gains in the wake of a global meltdown of commodities and equities. Most of the financial turmoil was associated with the Chinese economy. But the Greek economic problems, coupled with increasing problems in Turkey, have added to the global downturn in markets. The U.S. stock market made a yearly low. The slowing Chinese economy left its equity market near ruins.

Globally, grains were swamped. Yet, cotton kept the faith. The New York ICE has now experienced 16 consecutive days of increased open interest – another positive note.

To maintain upside momentum, the market needs to successfully challenge the 67 cent level and move to a close above 67.50 cents. Then, the stage will be set for a test near 68.15 cents, which opens the door for an attempt at 69 cents. However, for now it appears the market may attempt to consolidate its recent near 600 point gain before pushing higher. Additionally, the consolidation phase could see price slippage below 64.50 cents.

A close below 64.50 would allow for price slippage below 64 cents. It is important for mills to express demand at prices above 65 cents. To date, demand has established itself in the market, but it must continue. Certificated stocks continue to slowly decline – 1,000 to 2,000 bales a day – and that is a hint that demand will continue to be active.

The cotton trade continues to act surprised that the USDA estimated the U.S. crop at only 13.1 million bales and further indicating more adjustments would be made to endings stocks. Some feel that the excellent subsoil moisture in Texas is all that is needed to produce a bumper crop. They also mention the delayed heat units, but conclude all is back to normal now.

My thoughts are that the Texas crop is very abnormal. The wet crop got off to a late start, then numerous cool days appear to have kept the crop from reaching deep into the subsoil moisture. Too, a wide combination of additional excessive rains, excellent temperatures, then more dry weather followed by cool temperatures has played havoc with the physiological development of the plants. Many have abandoned numerous fruiting positions (boll development). The crop, excellent from the windshield, is more than shaky when actually surveying the field.

A survey suggested that a low boll count, coupled with lightweight bolls, should be expected and tends to confirm the USDA August objective survey.

The Indian monsoon continues to disappoint, as the government today noted the increasing drought problems and began calculations on the economic loss due to the monsoon failure. The world crop is getting smaller. If the cotton trade is correct and USDA is not, any increase in Texas production will still be swamped by the loss occurring in India.

There are two pieces of our long-time discussion that you will hear more and more about (finally) – the market’s desire for quality, and Chinese stocks are not a drag on the market. It all boils down to quality, quality, quality!

Finally, the market is finding a growing number of converts to that reality. Further, the Chinese stocks are not fundamentally bearish. In fact, they are totally market neutral. It is the perception that the Chinese reserve stocks are bearish. However, it is the cotton trade’s perception that the stocks are bearish. And, in the cotton market, “Perception is Reality.” Yet, the reality that the stocks are not market negative is now gaining attention.

The funds are beginning to find the cotton market. Nevertheless, the market still has to climb above grower hedging. It will.