B afraid 2 B short
We’ve seen some downward spikes recently among the soft markets. Cocoa does it, cotton and coffee this week have done it. And these spikes didn’t last, well it didn’t last long in coffee, cotton has been fairly quiet the past few days and hasn’t recovered from the down move, but I sure don’t want to be short cotton here.Subscribers have been reading about my concerns that a 200-300 point drop was possible, yet I recommended buying cotton and got filled early on the day of the drop. I didn’t stop myself out. Instead, I’m actually looking for an opportunity to buy more, and no not simply to average my cost down, that’s a losing strategy from the get go.
Cotton Export numbers were expectedly poor, (some might say worse than that), which gives rise to the need for the recent price drop. Cash cotton business needs a boost and the US will be more competitive with lower prices. Will the recent price shift downward do the trick? Doubtful in and of itself, but I strongly believe that this market has other reasons to move up. Firstly, because we have the smallest crop in my memory (and I’ve been around since cotton trading 1980) and small crops only get smaller. Second the trade are already holding short futures against their long physical position and they aren’t aggressively available to sell additional shorts heavily into strength. So, if (and when) the market gets strong from spec buying, who is going to sell it to them?
It is a fact that as physical cotton moves in the form of sales (principlly exports as domestic use is nominal) the trade will need to cover their shorts against sales they make. That means they’ll buy too. So the downside looks very limited in my eyes from current levels. The upside however is another story. We could see a tremendous bull mkt in cotton. Thus purely from a risk reward basis cotton looks ripe for a big move up.