NY futures continue to advance this week, with December gaining 233 points to close at 63.46 cents.
Speculators were able take out several resistance levels to extend the rally this week, pushing December to its highest level in eight months. Since making a low of 54.77 on June 22, the market has now gained nearly 9 cents over the last four weeks. What's impressive about this advance is that it happened against all odds, as outside markets were under pressure during most of cotton's rally and physical prices followed the lead of New York only to a small degree. Volume was moderately active but open interest continue to soar and has now gained about 18'500 contracts since June 24th, measuring 124'133 contracts as of this morning.
The storyline has been quite simple in recent weeks, as speculators of all sorts (index funds, large and small speculators) were clearly the driving force behind this strength, while the trade was taking the other side, apparently locking in some attractive basis long positions in foreign growths.
Based on the most recent ICE and CFTC spec/hedge data, and allowing for additional positions that were put on this week, we estimate that the trade may have sold around 2.2 million bales net since June 22, while the corresponding buying has been about equally split between index funds and traditional speculators.
The fact that about half of the net buying over the last three weeks came from index funds is supportive in our opinion, because unlike traditional speculators or the trade, these index fund positions are not price sensitive. Speculators and the trade on the other hand will react to price movement and in this regard it is not insignificant that the trade has sold about twice as many contracts as traditional speculators have bought during this rally, since this has exacerbated an already lopsided spec/trade ratio.
When we look at the current size of positions based on the latest available CFTC data, we notice that large speculators (mostly hedge funds) still have a relatively small exposure in the market with just 2.1 million longs and 0.5 million shorts. These numbers are from last week and speculators have probably added some more longs since then, but the bottom line is that speculators are still not very involved in our market based on historical norms. Also, the very small outright spec short position may explain why we didn't see more fireworks from 'buy-stops' when the market broke through resistance. There was simply not much there to be stopped out.
Compared to speculators, the trade has a rather substantial position, with 2.2 million on the long side and 11.3 million on the short side. The trade's short position has probably increased as well this week and we would not be surprised to see the trade around 10.0 million bales net short in tomorrow's CFTC report. In other words, for every spec long there are about four or five trade shorts in the market! Thedifference is explained with the index fund position, which amounts to about 7.0 million bales net long at the moment.
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