A few observations on the parabolic rise of mighty July. The first is that the US sets price for world cotton. The world balance sheet remains horribly bloated, as does Chinas, and other countries show various end stocks levels ranging from minimal to large. But the 3.2 Mb carryout in the US dominates all others. The second is that the market has chosen outright price and spreads to force cancels. Both have risen to cause much pain to end users, and will result in cancels and probably a few lay-downs which wont be known for a few weeks. The last observation is that the fireworks are taking place before notice day.
Trying to make sense of a parabolic bubble market, we pulled up July/Dec spreads going back to 1995. We found 6 with huge inverts, but little in the way of similarities between timing, end stocks, and length of invert. 1995 dropped from +2800 to +1800 (5/09), then soared to +3300 by 6/01. 2004 saw a peak at +430 on 5/21, dropping to -500 by 6/23. The 2010 year gyrated from +450 to +850 from early Mar to early May. On 5/21 the spread was +520, then it dropped to +140 by 5/31. 2011 was of course the all-time price year, and in early Mar the spread was near +8000. It dropped to +2200 on 5/09, then rose to +3700 on 5/18. It declined to +1500 by 6/08. In 2012 and 2014, the spread was similar in length, reaching near +1400 in mid June, then dropping to +50 and +400 in 2012 and 2014.
Did the Julys bubble get pricked today? Hard to tell, with a synthetic value near 8800. We see this as a fair value for an annual high, with end stocks at only 3.2 Mb and a ratio at 18%. In 2009/10 the US had a 19% ratio and peaked near 85c several times from late Feb to late July. The price spike this spring is seen as justifiable hyperbolic price and volatility, near the end of a year plus long bull market. Unless Mother Nature intervenes in the development of the summer crop, this bull will fade away, or shoot itself out by the time July expires. Farmers should be well over 50% hedged new crop, preferably 75%. Specs can lean into the Dec, use stops at 7530 and 7585.
Todays synthetic high, somewhere north of 8750. Recently the spot chart achieved the 62% retrace of the first move up, which was from the Mar 2016 low of 5566 to the Aug high of 7780. This leg up of 2214 was matched today. Add 2214 to last Aug low of 6522 to get a target of 8736. Thus cotton has had two legs nearly exactly equal in length, as todays limit bid was 8718, and the synthetic high was 8770 by one source. Close enough. One more thing record volume near 106k. The equal legs and record volume, may have this bear.+
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