News Flash

High on stocks, cotton cos adopt wait-n-see attitude

30 Nov '07

4 min read

NY futures had a mixed performance since our last report on November 15th, with March losing 141 points during that period to close at 65.04 cents, while December '08 remained unchanged at 72.75 cents.

A glance at the candlestick chart tells us just how weak the March contract has acted over the last couple of weeks, as it has posted 'black candles' in nine out of the last ten sessions. A black candle means that the market closed lower than it opened on a particular day, which is a clear sign that sellers are in control.

The lone white candle came yesterday, when the market posted a nice rally, but it did so without much volume behind it and by adding just 476 new contracts to open interest, which is an indication that it was a 'dead cat bounce' rather than any new bullish momentum.

With evidence mounting that the US economy is headed towards a period of stagflation, cotton traders are finding it difficult to figure out how to play into such a scenario. While the 'stagnation' part suggests a slowdown in consumer demand, which is a negative, the 'inflation' part should ultimately translate into higher nominal prices of just about everything that is denominated in US dollars.

This dichotomy expresses itself in the market, as nearby months are reacting negatively to a sluggish demand situation, while the deferred months are holding relatively steady, supported by speculators who continue to believe in a longer term bullish trend due to the panicky liquidity pumping by the Federal Reserve.

While overall open interest has declined by around 4.0 mio bales over the last month due to the liquidation of current crop positions, open interest in December '08 has actually risen by almost 1.0 mio bales.

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