NY cotton futures trade by-directionally this week

14 Jul '06

6 min read

The market traded undecidedly in both directions, which seems to confirm our theory that current values can be viewed as both too cheap and too expensive, depending on whether one looks at the market from a buyer's or a seller's perspective.

The first big move occured to the downside, after the market broke through the 52.95 cents support level last Friday, which triggered a sizeable amount of spec selling. Interestingly, it was new spec selling rather than long liquidation that was behind this decline.

According to the latest spec/hedge report, spec longs actually added 365 contracts last week, while spec shorts increased their positions by 4'649 contracts. The trade was a decent buyer during this break, adding 1'664 contracts of new longs and buying back 2'620 shorts.

The countermove came in reaction to a slightly friendly USDA report, which managed to calm the nerves of traders who had feared a downward revision of China's consumption number. However, there was not much conviction behind this rally, as volume amounted to a paltry 12'700 contracts.

It was more a lack of selling than a rush to go long that led to this advance, with the buying coming primarily from spec short covering. The trade was seen as a good scale up seller into this strength, which kept the market from advancing beyond 54.00 cents.

When we look at the latest USDA world supply and demand numbers, we find that supply in 2006/07 is nearly identical to the current season. Beginning stocks as of August 1st are at 53.0 mio bales, which compares to 54.0 mio bales a year ago, while production is estimated at 114.4 mio bales next season, or just 0.3 mio bales more than this year. In other words, total supply for 2006/07 amounts to 167.4 mio bales, or 0.7 mio bales less than in 2005/06.

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