NY futures dropped precipitously this week, with May falling 979 points to close at 71.02 cents, while December sold off 925 points to close at 79.28 cents.
The market's rollercoaster ride continued this week, as values dropped down to long-term support levels before rebounding in today's session. The early limit down move this morning presented a perfect set-up for a bounce, because at that point both May and December were sitting right at a long-term uptrend-line dating back to May 15 last year.
With every momentum indicator flashing oversold signals and knowing that the market could do no worse than limit down until Monday, momentum traders saw this as a worthwhile entry point for a rebound move.
This technical support was reinforced by improving fundamentals, as mills finally came out of hibernation by booking a sizeable volume of business last night and by fixing a decent amount of on-call sales, which prompted the trade to buy some short futures back.
The sharp sell-off in the cotton market was certainly connected to the broad-based correction that has engulfed the entire commodity complex, with the CRB index suffering through its biggest weekly loss in half a century, as it fell by 9.25 percent from last Thursday's record high of 420.64.
Some of the Ag commodities relevant to cotton were especially hard hit during this sell-off, as November soybeans have now dropped 3.08 dollars or 21 percent from their March 3 high, while December wheat has crashed 2.64 dollars or 21 percent since March 12 and December corn has given back 64 cents or 11 percent after setting a contract high on March 11.
The current exodus from commodities seems to be tied to the re-pricing of risk that is going on in the credit markets, as lenders and futures exchanges are demanding higher security deposits from highly leveraged hedge funds. This in turn has forced a number of these hedge funds to raise cash by liquidating some of their assets, such as commodities, which unlike many credit instruments remain very liquid.
Hedge funds have been a strong force behind the commodity boom and if they stop buying and instead take some chips off the table, there is really nobody else to take their place in bidding for some of these overpriced commodities such as wheat or soybeans. This can result in a big void underneath the market, because commercial buyers are not willing to pay 12 dollars for wheat or nearly 16 dollars for soybeans.
However, we believe that it is important to differentiate between cotton and some of these other Ag commodities, because cotton is not nearly as overpriced. Wheat is still up about 300% from where is was a couple of years ago, while soybeans are roughly 250% ahead and corn is about 150% higher.
Cotton in comparison is up by just about 40% since breaking away from a multi-year trading range near 50 cents. If we further factor in that the dollar index has lost about 20% over the last two years, cotton is barely ahead at all.
