wmeubank@ocp.kcmo.com
PRUDENTIAL SECURITIES, INC.
One New York Plaza, New York, New York
(December 8, 1997) COTTON: The streak was broken on the last day of this week but the damage was already done. After six consecutive losses, the March delivery posted its first winning session. The modest gains did nothing to convince bears that they had anything to fear, nor were chart players concerned. March lost 190 points for the week, paltry compared to the soon-to-expire December, which lost 352 points. The May and July deliveries gave-up 176 and 159 points, respectively, while December '98 declined a measly 46.
Cotton prices had few friends again this week as virtually all fundamental and technical factors conspired to press the market lower. Except to lock-in good values for end-users, there are few reasons on the horizon to rally prices and sustain those gains. Too much cotton chasing a good but dicey demand outlook is not enough of a reason for shorts to abandon their sizable positions. Likewise, the weekly continuation chart showed a lower close for the 5th straight time, prompting those types of traders to stay the course as well.
While bear markets don't normally hold the same fascination for traders as bull markets do, cotton has managed to keep the interest of a lot of market participants. November set a record for trading volume of cotton futures and options. The huge amount of price-fixing to be done at the start of the month guaranteed that it would be a November to remember. Open interest set its record of more than 96,000 contracts early in the month. By the end of the month, open interest had decreased by some 16,000 lots, but the massive amount of rolls to more distant months put monthly volume in the record books.
Even for a shortened month, 266,800 futures and 37,360 options traded, an average of just under 15,000 futures per working day. This compares to 229,281 futures and 48,908 options last year. In November 1994, the marketing year of “dollar cotton” didn't even come close–205,936 futures and 58,555 options.
Seasonals suggest a tendency for cotton prices to rally significantly this month. Given current levels it's not unreasonable. The undeniably large speculative short position could reverse the trend, in the near term, as year-end booksquaring heats up. Fundamentally, it will be a tough concept.
Rich Cantor
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