Technically Speaking, Pay Attention to Fundamentals
The new crop December futures contract simply got too close to 69 cents and had to back off, lest the bulls get too excited. All contracts closed the week in the red.
While growers are wanting to see a 70-72 cent trade (and don’t write that off), mills are sitting back hoping to see the market break below 66 cents and drop to the low 60s. In the short run, I favor the bulls over the bears. Note I said “the short run.” Based on Mother Nature dressing in her normal attire, it is difficult not to side with the bears. This has been the market’s major theme for some two months.
It is just too early to peg the crop size in either India or the United States, two of the world’s three largest producers (the same can be said of China, but neither the Chinese crop nor its carryover stocks will be available to the world market.) This bullish-bearish dichotomy is expected to keep the market range bound until the release of the August USDA supply demand report, another two weeks away. The narrow three-cent trading range – 66-69 cents – could bleed a little either way, but it will take unexpected supply news to break the range.
There is not disagreement among analysts that demand is increasing and world carryover will be lowered in the coming 2017-18 marketing season. Increases will be noted in China, India, Bangladesh, Indonesia, Vietnam, Turkey and other countries. However, Chinese demand has increased at a stronger pace than has generally been recognized. This bodes well for the major exporting countries – U.S., Australia and Brazil, the primary sources of high quality cotton (West Africa does fill a void, but its quantity is limited.)
Assuming the monsoon continues to be fruitful, India will boost its export share as well. More importantly, it will not be in the market for U.S. growths. Brazil and Australia are major suppliers of high quality, but their volume is somewhat limited. Thus, the U.S. will continue to be primary shopping ground for textile mills.
This was evidenced again in the weekly export sales report, as U.S. next marketing year sales totaled 232,600 RB. With less than two reporting weeks remaining in the old crop season, prior year sales have climbed about 5.0 million bales and will be some 5.3 million at the end of the old crop year. This will get the 2017-18 marketing year off to a furious start, as forward year sales will be the third highest in at least 30 years.
Additionally, another indicator of demand boost is the level of old crop export shipments. Shipments have now exceeded the current USDA estimate and will probably climb to 14.8 million – some 300,000 bales more than the USDA number. Thus, 2016-17 carryover will fall to 2.9 million bales. The market is trading with that expectation.
The continued strength in export sales and shipments have caused the October-December inversion to further widen – 142 points on the weekly close. Additionally, the December-March inversion strengthened out to 57 points. Likely, given the shortage of high quality that will be available for third quarter shipment, the market inversion will continue, being more pronounced in the October-December spread. It will be difficult for the December-March inversion to be maintained, but it too is presently held captive by Mother Nature.
The typical/normal crop development and harvest season must progress such that enough of the 2017 crop can be harvested in time for delivery against the December contract. That is easy to say, but considerably risky for cooperatives/merchants needing to satisfy mill delivery requirements. The potential risk this season is far greater than most, due to the low U.S. carryover and the high level of early export sales.
Textile mills continue to sit back counting on lower prices during the coming season. Mill on-call sales are beginning to swamp on-call purchases. But with nothing but time in front of the market, the situation is not gaining much attention. It should be noted as mills could be squeezed in 2018 as they were in 2017.
I received some criticism relating to last week’s comments suggesting that technicals were carrying the market and fundamentals were not important. Fundamentals are important. In fact, it is the fundamentals factors that determine the price from season to season and in between. Fundamentals determine price, period. However, during times of market lapses such as “dead fundamental news,” technicals take over and rule the day (such are the Dog Days of August). Too, unless there are new fundamentals almost daily, then, at any given point in time, the technical indicators can and have taken over market trading.
Fundamentals can be viewed as the price map that takes the market from point A to point B. However, in that the market determines daily – or minute by minute – where it is going, traders do not know the way. Thus, technical indicators become keys on the road map that traders use for that price trip. Sometimes a detour may not make logical sense, and, at other times, it may seem prices might be going the wrong direction. But technicals spot these diversions and forks in the road.
Thus – and my fundamental friends cringe when I say this – Technicals are the Leading Indicator of Fundamentals. In my personal trading – which I no longer do – most every time my fundamental mindset and I went against the technicals, I was proven wrong.
The market will look for the very low 70s in August, but then it will likely move lower into harvest as the U.S. crop does hold the 18.6-19.3 million bale range. A smaller crop would support prices at a higher level.
Give a gift of cotton today.