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NY futures continue to press higher this week
28 Aug '10
5 min read
The CFTC reports only accounts of large speculators, typically hedge funds, which increased from 79 accounts holding long positions on July 20 to 134 accounts on August 17. The ICE spec/hedge report, which includes small traders as well, shows that long accounts increased from 926 to 1556 between July 16 and August 20. This clearly tells us that the cotton market has become an object of speculation for many speculators large and small.
What worries us in that regard is the large net short position in futures and options that the trade has accumulated over the last four weeks, as it has grown by 6.0 million bales to 14.3 million bales as of August 17 and is probably at more than 15 million bales by now. Although we are still a far cry from the 23.4 million bales the trade was net short in March 2008, the current shorts are distributed among fewer traders and some of them may start to feel the pinch.
For every cent the market goes up on a 15 million bales net short position, the trade will have to pay 75 million dollars in margin calls. We therefore have to wonder how much more of this spec buying the trade can handle before cash becomes an issue.
So where do we go from here? Although prices are at lofty levels from a historical perspective, we don't see an end to this bull market just yet. Speculators like the price action and the fundamental story behind it and keep adding money to the long side. With the crop still out in the field and owning a 15 million bales net short in futures, the trade doesn't have the confidence or the money to oppose speculators at this point.
The events of March 2008 are still fresh on traders' minds and unlike two years ago, when the Bull Run was caused by a cash squeeze, there is a strong fundamental basis behind the current move. This is a dangerous time to be short, at least until the Northern Hemisphere crops are in, because the long-range forecast calls for wetter than normal weather in the key growing areas of the US and China.
What worries us in that regard is the large net short position in futures and options that the trade has accumulated over the last four weeks, as it has grown by 6.0 million bales to 14.3 million bales as of August 17 and is probably at more than 15 million bales by now. Although we are still a far cry from the 23.4 million bales the trade was net short in March 2008, the current shorts are distributed among fewer traders and some of them may start to feel the pinch.
For every cent the market goes up on a 15 million bales net short position, the trade will have to pay 75 million dollars in margin calls. We therefore have to wonder how much more of this spec buying the trade can handle before cash becomes an issue.
So where do we go from here? Although prices are at lofty levels from a historical perspective, we don't see an end to this bull market just yet. Speculators like the price action and the fundamental story behind it and keep adding money to the long side. With the crop still out in the field and owning a 15 million bales net short in futures, the trade doesn't have the confidence or the money to oppose speculators at this point.
The events of March 2008 are still fresh on traders' minds and unlike two years ago, when the Bull Run was caused by a cash squeeze, there is a strong fundamental basis behind the current move. This is a dangerous time to be short, at least until the Northern Hemisphere crops are in, because the long-range forecast calls for wetter than normal weather in the key growing areas of the US and China.
Plexus Cotton Limited
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