After a long and heavy surge in bullish positions by speculators fearing tight supplies in the fiber, U.S. cotton futures plunge 3 percent on Tuesday, the most in a month. The market, which had hit six-month highs on Monday, could drop further in the near term before regaining strength.
According to Jobe Moss, cotton broker at Moss Capital Management in Lubbock, Texas, there has been an uptrend since November and Tuesday there was a break in the trend line, triggering a lot of stop-loss selling. The market may have very well seen its top. But the price keeps going up, so they could recover after some losses.
The most-active May cotton contract on ICE Futures U.S. fell 2.75 cents, or 3 percent, to a Feb. 7 low of 86.55 cents a lb. It was the contract’s sharpest drop in a day since Jan. 27.
In the previous session, May cotton rose as high as 90.44 cents, marking a peak since Aug. 20, before closing at 89.30.
On Tuesday, the market opened flat but tumbled soon after.
The sudden reversal came as a surprise to many as there wasn’t any major fundamental news or data to trigger the selling.
Some speculated that a drop in the U.S. consumer confidence for February, along with slower gains in domestic home prices in December, could have been a factor that weighed on cotton, an industrial commodity.
But Sharon Johnson, senior cotton analyst at KCG Futures in Roswell, Georgia, said that the market was clearly overbought and players were beginning to fear it could not hold near the upper end of 90 cents/lb.
Johnson cited a buildup of more than 10,700 new speculative net-long contracts in cotton over the past two weeks, according to figures released by the Commodity Futures Traders Commission.
Open interest in May cotton also rose by a staggering 2,400 contracts on Tuesday alone, indicating a further buildup in longs.
The market had started out strongly this year, rising 6 percent year-to-date until Monday’s session. It is up about 3.5 percent now, year-to-date.
Cotton was one of the better-performing commodities of 2013, gaining 13 percent mostly on a November-December rally, after a pickup in U.S. sales cut sharply into inventories.
Courtesy: Reuters
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