NY futures on the upside this week
NY futures exploded to the upside this week, with March rallying 393 points to close at 72.92 cents, while December advanced 194 points to close at 72.70 cents.
The heavy spec liquidation that started in early January culminated in a heavy volume 'washout' session last Friday, which forced March to close as far down as 66.62 cents. As the ICE spec/hedge report would reveal, speculators sold an additional 14'135 futures contracts net (1.4 million bales) last week alone.
Although we don't have the latest CFTC figures yet, we estimate that speculators have now sold a total of 5.0 to 5.5 million bales net over the last five weeks. Most of that was long liquidation, although we did see a slight increase in spec shorts during this decline as well. However, overall spec participation, outside of index funds, is now at the lowest level in several years.
With speculators basically out of the game for now, we have just two major players left - index funds and the trade. Index funds were about 7.3 million bales net long a week ago and they have probably not seen a big change since then, maybe a slight reduction to 7.0 million net long. Again, we need to remember that index funds are not driven by price, but by investment dollars flowing in and out of these index products.
That's important in this discussion, because they won't be readily available to take the other side of a trade in case someone else decided to buy or sell. On the other side of this big block of index fund longs is the trade, who is probably around 8.0 million bales net short at this point after covering over 6 million bales since the beginning of the year.
Now, if the trade continues to get out of basis-long positions and mills fix on-call sales (3.1 million bales are on March, May and July), both of which requires short futures to be bought back, then who will be there to take the other side? Index funds are passive and speculators have very little involvement at the moment. And if speculators were to return to the market, they would probably not seek to be on the short side anytime soon after what has happened this week; instead they are more likely to join the trade in buying the market.
This may help to explain why it was so easy for the market to shoot up more than 700 points from low to high in just three sessions. With the sell side exhausted, all that was needed was a trigger to ignite a rally into a void of selling. On Monday it was a more positive tone in the outside markets and a weaker dollar that set the ball rolling and then on Tuesday we had a bullish USDA report that sent the remaining spec shorts running for cover, triggering all sorts of buy stops along the way. It took the market just four sessions to claim back all the losses it had sustained over the previous sixteen.
The bullish surprise in the USDA report was not necessarily the increase of US exports to 12.0 million bales and the corresponding dropin US ending stocks to just 3.3 million bales. Traders already knew that at the current pace of sales we would basically be sold out by late summer. What surprised the market was the 1.17 million bale increase in global mill use to 115.53 million. If the USDA is correct with their consumption estimate, it means that world production will have to increase by 12.79 million bales next season just to keep ending stocks from shrinking any further.