July & Dec NY cotton futures post gains this week

19 Apr '14

6 min read

July still has way too many shorts in the game for our taste and with liquidity likely to dry up until the next roll period in early June, we see the potential for short-covering rallies as basis-longs head for the exit and mills fix additional quantities.

December is still undervalued in our opinion, especially with China issuing additional import quotas. Also, let’s not forget that in two months from now index funds will have to roll their longs to December and based on the current inversion to July they would have to buy an additional 6000 – 7000 bales in order to maintain the same dollar investment. This translates into a decent amount of buying power and we don’t believe that the trade will provide a matching short position unless the price becomes more attractive.

March may be the first month to feel any bearish pressure, but only if there are no hiccups on the production side. In other words, there is still plenty that can go wrong, like a prolonged drought in West Texas or a subpar monsoon in India, and we would therefore approach the short side only via put spreads at this juncture.

Plexus

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