Every major commodity index is up between 30 and 50 percent over the last 52 weeks, with the energy-heavy GSCI leading the way. We therefore see no end to this asset allocation shift into commodities and expect open interest to grow even bigger over the coming months.
This kind of money inflow creates an imbalance in the market because as we all know there has to be a short for every one of these eager new longs. The question is who is willing, or in the case of the trade able to go short in this kind of a market?
As we have already mentioned, the trade is about as short as it can afford to be and may actually be forced to buy back some of its position, which would fuel the current trend even further.
This leaves speculators as potential short candidates, but speculators typically do not sell into a strong trend and instead wait for a reversal pattern to provide them with an entry point. We may therefore have a potential void of sellers that could lead to further gains in the market, to levels at which shorts are once again emboldened to step into the fray.
From a technical point of view the market looks extremely strong. Today's contract highs were achieved in very heavy volume of around 73'000 futures and 43'000 options, which amounted to a combined turnover of a record 117'373 contracts.
Open interest, which rose by 5'149 contracts yesterday, probably increased further today as specs added additional longs and new trade shorts were established when December traded over 80.00 cents. Moving averages and momentum indicators have turned up again, giving chart traders the 'all clear' sign to join the trend and warning shorts to get out of harms way.
Even though we fully understand the reasons of those in the trade who disagree with this market based on a purely cotton related supply/demand point of view, we need to respect the signals the market is sending us and avoid standing in front of this juggernaut.
By the way, the definition of a juggernaut is "any literal or metaphorical force regarded as unstoppable that will crush all in its path", which seems to be an appropriate description of current situation. Remember that markets can remain irrational for much longer than you can stay solvent!
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