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News Flash
Cotton export sales slide down
23 May '08
4 min read
By occupying about 40 percent of the long side, index funds, which are only driven by liquidity, have created an imbalance between the remaining 'market driven longs' and the entirely 'market driven shorts'.
As long as the fundamentals of a commodity remain bearish to neutral, like in the case of cotton, this imbalance may not be enough to trigger a runaway bull market, although it has led to some liquidity issues that caused the unpleasant spike in early March.
However, if the fundamentals of a commodity are friendly, like in the case of crude oil, this imbalance between market driven longs and shorts will greatly amplify any bullish move. Instead of a 30 or 40% advance, the market now suddenly goes up three or four times that amount.
One problem we see in this growing public discussion about commodities is that the dynamics of futures markets are generally little understood, even by Wall Street insiders and particularly by the financial press. For example, this morning a prominent business news service was commenting on the crude oil rally with the widely held belief that ".everyone has jumped on the bandwagon.
There is agreement that $ 200 oil is possible and that's getting more and more people into the market." In fact, quite the opposite is the case, as open interest in crude oil futures has declined by about 8% recently, indicating that this latest rally was actually the result of shorts being squeezed out of the market.
So where do we go from here? Probably nowhere in any hurry! For the last four weeks the market has been stuck in a relatively tight range and most momentum indicators are flatlined. There seems to be plenty of support below the market, because mills still need to cover nearby shipments or fix the remaining on-call contracts in July, which still amounted to 1.3 mio bales as of last week.
What's needed is a catalyst to get the market out of this range. Several come to mind, as weather problems, lower than expected plantings, a weaker dollar, or a further advance in commodity prices may weigh in on the bullish side, while the certificated stock, slow sales, a stronger dollar, or a pop of the commodity bubble due to new legislation are some of the potential bearish factors.
As long as the fundamentals of a commodity remain bearish to neutral, like in the case of cotton, this imbalance may not be enough to trigger a runaway bull market, although it has led to some liquidity issues that caused the unpleasant spike in early March.
However, if the fundamentals of a commodity are friendly, like in the case of crude oil, this imbalance between market driven longs and shorts will greatly amplify any bullish move. Instead of a 30 or 40% advance, the market now suddenly goes up three or four times that amount.
One problem we see in this growing public discussion about commodities is that the dynamics of futures markets are generally little understood, even by Wall Street insiders and particularly by the financial press. For example, this morning a prominent business news service was commenting on the crude oil rally with the widely held belief that ".everyone has jumped on the bandwagon.
There is agreement that $ 200 oil is possible and that's getting more and more people into the market." In fact, quite the opposite is the case, as open interest in crude oil futures has declined by about 8% recently, indicating that this latest rally was actually the result of shorts being squeezed out of the market.
So where do we go from here? Probably nowhere in any hurry! For the last four weeks the market has been stuck in a relatively tight range and most momentum indicators are flatlined. There seems to be plenty of support below the market, because mills still need to cover nearby shipments or fix the remaining on-call contracts in July, which still amounted to 1.3 mio bales as of last week.
What's needed is a catalyst to get the market out of this range. Several come to mind, as weather problems, lower than expected plantings, a weaker dollar, or a further advance in commodity prices may weigh in on the bullish side, while the certificated stock, slow sales, a stronger dollar, or a pop of the commodity bubble due to new legislation are some of the potential bearish factors.
Plexus Cotton Limited
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