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NY futures remain on defensive

22
Jan '10
NY futures remained on the defensive this week, with March dropping 106 points to close at 71.85 cents.

After starting the year with a promising rally to an intra-day high of 76.77 cents - the highest reading of a spot month since April 2008 - the market has since come under steady pressure from spec long liquidation, which has intensified after a four-and-a-half month uptrend line was broken last week.

However, even though the market may have felt heavy in recent weeks, actual losses have been relatively well contained and many traders may be surprised to learn that the March contract has given up only about a cent over the last fortnight. Two weeks ago March had closed at 72.89 cents, last Thursday it was at 72.91 cents and today it settled at 71.85 cents. Strong trade buying has so far been able to provide enough support to hold the onslaught of spec selling in check.

By looking at the changes in open interest we can get some idea of the extent of this spec liquidation. On January 4th total open interest had reached a peak of 192'498 contracts, whereof March had 129'280 contracts. In the following eleven sessions we saw total open interest drop by 18'540 contracts to currently 173'958 contracts. However, the March contract, which is where most of the spec positions are located, dropped no less than 28'950 contracts, while the rest of the board actually added 10'410 contracts.

The CFTC report confirms that it was by and large 'get me out' spec selling into scale down trade buying that caused the market to retreat. The latest two CFTC reports show that between December 29 and January 12 the trade net short position decreased from 14.45 to 12.70 million bales, a drop of 1.75 million bales net. During the same time speculators cut their net long exposure by 1.50 million bales, from 6.40 to 4.90 million bales. Index funds saw only minor changes to their net long position, which dropped by 0.25 million bales, from 8.05 to 7.80 million bales. We need to bear in mind that the latest CFTC report is a snapshot from six sessions ago and since then there has been additional liquidation on both sides. It is probably safe to assume that since the beginning of the year the trade has covered some 2.5 million bales of its still sizeable net short position, while speculators and index funds have liquidated as many net longs.

There are a few observations we would like to make in regards to the current positions of these various market participants. First of all we believe that the net index fund position is not going to change much over the next few months. Maybe it will drop to 7.5 million bales net, but we don't foresee any mass exodus out of commodity index products as they form part of asset diversification portfolios and they are not leveraged at all. If we are correct in our assumption, this would leave us with an estimated spec net long of some 4.5 million bales and a trade net short of around 12.0 million.

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Plexus Cotton Limited


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