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Market moves in right direction
Jan '08
NY futures gave back some ground this week, as March lost 175 points to close at 66.96 cents, while December dropped 190 points to close at 74.56 cents.

The long awaited correction finally arrived and it was swift and steep, as March dropped nearly 300 points from yesterday's intra-day high of 69.65 cents. Earlier in the week, additional spec buying had extended the rally, which began on December 6, to nearly 700 points.

In the process open interest increased by over 50'000 contracts, as it measured a record 261'151 contracts or 26.1 mio bales this morning. But after the huge jump in open interest of over 10'000 contracts in Tuesday's session, the market seemed to be ready for a breather.

The market has been overbought by technical measures for quite a while and initially it may have been a void of additional buying that allowed this correction to unfold. However, when the market broke through the up-trend line this morning, selling pressure intensified and values caved in.

What may have added to the weakness over the last couple of days is the rebalancing of the two major commodity indexes, the S&P GSCI and the Dow-AIG. Every year, these two commodity baskets, which form the base for many of the commodity index funds that track them, rearrange the weightings of their individual commodities.

In the case of cotton, these adjustments amount to a miniscule increase in the S&P GSCI of about 0.02%, from 0.80 to 0.82%, while in the Dow-AIG cotton suffers a severe cutback of 0.48%, from 2.96 to 2.48%.

When we try to express that in terms of how many contracts will have to be bought and sold to account for this readjustment, we come up with about 800 contracts that have to be bought in the S&P GSCI, while it requires the selling of over 6'000 contracts in the case of the DOW-AIG.

Interestingly, the DOW-AIG readjusts its position during the monthly roll period between the 6th and 10th business day, which falls between the 9th and 15th of January. Therefore, it is quite possible that this rebalancing played a significant part in the selling we have seen over the last two sessions.

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