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Cotton futures post modest gains
25
Jul '08
NY futures were able to post small gains this week, with December advancing 75 points to close at 73.86 cents, while March gained 80 points to close at 79.33 cents.

The bulls survived another cliffhanger this week, as the December contract recovered from a 7-month low Wednesday morning and rallied more than 300 points over the last two sessions to close at its highest level since July 7. However, before we get too excited about this bounce we need to realize that it happened on extremely low volume and that there is absolutely no conviction behind any of these moves, up or down.

Nevertheless, the bullish camp will claim another minor victory this week, because the market successfully held this important support level just above 70 cents and with every passing day the technical picture is improving ever so slightly. A few more days of this sideways action and we may see some technical indicators giving us a buy signal, like a potential crossing over of the 7-day/21-day exponential moving averages.

The cotton market once again displayed quite a bit of relative strength in comparison to other commodities, which continued to get hammered this week. The CRB lost another 20 points or nearly 5 percent and is now over 60 points below its record close of July 2nd.

Much of this selloff in commodities has to do with the pressure that Congress has placed on speculators. Almost daily there are hearings about this subject on Capitol Hill and the fact that some of these high-flying commodities like crude oil and grains have sold off recently is taken as proof by lawmakers that they are on the right track with their pursuit of speculators. At the center of the debate are position limits, which would include everyone that cannot prove a direct need to hedge against a physical commodity.

Right now swaps against index funds are excluded from such position limits, which have allowed these long-only positions to mushroom in recent years and they have certainly exacerbated these bullish moves in commodities. Should Congress, via the CFTC, pass regulation that treats index fund related positions the same as any other speculator and therefore makes them subject to position limits, it could change the game quite significantly.

How such a new rule would be implemented remains to be seen, because we cannot imagine that existing positions that were legitimately established under the current set of rules would be forced to liquidate. Maybe such positions would slowly get phased out over time as the respective contract months expire and any new positions would become subject to limits.

However, the longer term effect would be the same, namely that the influence of index fund positions in the various commodity markets would decline. The uncertainty about this issue has already caused some speculators and index traders to curb their exposure to a more manageable size and as a result open interest has started todecline in many commodities. Cotton is no exception, with the current open interest of around 218'000 contracts measuring just about 70 percent of its record earlier this year.

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