Sports Analogy for Market Reality
May 25, 2010 How’s this for confirmation that the market seems to be trying to find some direction? I wrote basically this same column last week, but didn’t use it.
There are three professional sports teams that I have always been a fan of: The New York Giants in football, the St. Louis Cardinals in baseball, and the Boston Celtics in basketball. All three had somewhat of a local connection for me when I became a fan.
Last week, I was watching Game 2 of the NBA Eastern Conference Finals between the Celtics and the Orlando Magic and exchanging text messages with my son, who’s an even more rabid Celtic fan than I. At the end of the third quarter, the Celtics were leading 78-70. I sent my son a text: “We have to get off 78 fast.” Leads don’t last long in the NBA. The Celtics finally did and went on to win.
That same scenario is playing out for the ICE December contract – we’ve been stuck on 78.00 for too long. That seems to be the price level the market just can’t break through and stay above, as you can see quite clearly in red on the chart.
Mississippi State University economist Dr. O. A. Cleveland wrote last Friday in his weekly newsletter: “While the market continues to find very good cash business and technical market indicators point to higher prices, time is beginning to run short for a December push to 80 cents or a July jump above 86 cents, short of a significant weather event. Yet, it is too early to give up on seeing a 3- to 4-cent higher price mark.”
I’m never one to disagree with Dr. Cleveland. It’s high time to get off 78.00. If the market does, then the 3- to 4-cent rise is easily in sight. If it doesn’t, we could see a fallback that will test the support level of 76.00 (green line).
Allenberg Cotton Co. CEO Joe Nicosia said at the Mid-South Farm & Gin Show at the end of February that it’s all about what is in the ground prior to May, and what is coming out of the ground after May. Well, it’s mid-May and you can bet something is coming. And I think it will happen before USDA’s Planted Acreage report on June 30.
The reason I say this is because of the convergence of the resistance (red) and the uptrend (yellow) lines. It’s not going to take much to cause a dramatic price move, up or down, away from the convergence point, due to events churning all around us – the economic meltdown in Europe, replanting in China, China’s import situation, India’s export situation, weather … the list is endless.
I’ve seen risk-management recommendations from cotton economists saying it’s time to eliminate as much as 60% of your risk by locking in a price above 75-cents. I’ve also heard them say it’s never a mistake to lock in a price that will cover your cost of production – everything else is gravy.
No argument from me, because we’re going to get off 78 – above it or below it – and I think it’s going to happen fast.
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