By Jeff Thompson, Autauga Quality Cotton
Did Christmas come early? A look at last week’s market action and one would think so. December futures, after sliding to a low of 70.21 on Monday, rallied seventeen cents to close Friday at 86.93. Nearly recapturing all the losses of the previous three weeks. More impressive it traded limit up for three consecutive days on high volume.
With the macroeconomic environment showing little sign of improvement, such a spirited move was unexpected. After establishing what appears to be a harvest low in Monday’s trading, the question now becomes does this rally have the strength to make another run at a dollar or is it simply a bear market rally. As a cover month nears its notice period there is always some jockeying of position amongst traders. However, high volume experienced last week suggests heavy spec trading. Since holding a net long position of 11.5 million bales a year ago and cotton prices at $1.10, they have been heavy sellers taking prices down with them. In just the past nine weeks they’ve sold an equivalent of 4.4 million bales and prices have fallen twenty-eight cents. Its obvious specs have a herd mentality like when that first cow hits the gate the others follow. Such was the case last week as charts improved with downtrend lines and moving averages eclipsed, in a panic specs rushed to cover these shorts. Whether this is a market reversal or bear market rally depends on the extent of their short covering or if we see some momentum buying from them.
Also contributing to the rally, were last week’s exceptional export sales. Combined current and new crop sales totaled 203,200 bales, up 173 percent from the previous week and 59 percent above the 4-week average. This was the best week of sales for the marketing year. China was the major purchaser committing to almost two-thirds of these sales.
Where to from here? Despite these positive winds, price pressures remain in the form of high inflation, a strong dollar, higher borrowing costs, heightened tensions in Ukraine, Europe’s energy crisis, and the threat of Covid lockdowns in China. All certain to constrain consumer discretionary spending thus negatively affecting demand. Be reminded no market advance can be sustained for long without demand.
Short term, we expect prices to settle into a nearby trading range as spec short covering slows and further selling pressure is all but unlikely for now. However, two events this week will have an impact on markets. First, Tuesday’s general election could provide a shot in the arm if there is a change in Congressional leadership. The notion our government will return to one of fiscal restraint and stability will be welcomed by the business community. On the other hand, Wednesday brings the ever-feared USDA November WASDE report where another sizeable reduction in world consumption is anticipated. Many in the industry feel actual global consumption will be closer to 110 million. If so, the resulting bearish increase in world-ending stocks could threaten this rally.
Finally, we extend our congratulations to the Houston Astros as you may have saved us from economic ruin! -