Spread Edge Capital specializes in seasonal spread trading across a wide variety of commodity markets. A spread trade is the simultaneous purchase and sale of the same commodity with different delivery dates. SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.
Overview
Each week the SpreadEdge Newsletter documents an extensive list of seasonal, technical and fundamental indicators for the various commodity markets. This week Cotton is in the spotlight as the % carry yield has made a big improvement, hedge funds are beginning to reduce their record shorts and Cotton has broken through a critical resistance level. Cotton looks to have put in a bottom and higher prices over the near term seems most likely. In this article, we will review the % carry yield, the hedge fund position estimates, the relative price and positioning, and the technical analysis of the daily chart.
% Carry Yield
Futures calendar curves vary in shape over time. Some often invert, with front-month contract prices exceeding those of later contracts, resulting in positive carry. Conversely, some curves exhibit contango, leading to a negative carry. % Carry yield is the one-year calendar curve yield as a percentage of contract notional value. Markets tend to reverse when they get at or near their highest or lowest levels over the past 52 weeks.
The % carry yield closed last week at 0.0% and is well off the low from 8 weeks ago of (7.3%). Cotton is normally a positive carry market but spent 18 of the previous 20 weeks in negative territory. Cotton could easily run back into double-digits in the next several weeks.
Hedge Fund Position Estimates
The Commitment of Traders (COT) report, issued by the Commodity Futures Trading Commission (CFTC), offers a weekly snapshot of the positions taken by different market participants in the U.S. futures markets. Published every Friday at 3:30 PM Eastern Time, the COT report reflects positions held as of the previous Tuesday's closing business hours. Peak Trading Research assesses the latest COT report, examining alterations in price and open interest to provide an appraisal of net fund positioning daily.
Hedge funds have started to reduce their record shorts, but Cotton is still very near its' lowest level for the week. Last week hedge funds had a net short position of (38,194) contract which is over 14,000 contracts higher than the low on August 9th. Hedge funds are currently over 50,000 contracts away from the 1-year average and 134,000 contracts away from the high this past year.
Relative Price and Positioning
Relative Positioning – Oversold versus Overbought on the horizontal axis. COT current net position compared to the COT data over the past 24 months.
Relative Price - Cheap versus Expensive on the vertical axis. A comparison of the front month current price compared to the front month price over the past 24 months.
Cotton is still one of the most “Cheap and Oversold” markets within the agriculture complex. However, Cotton had made a big move to the upper right over the past 5 weeks.
The Bottom Line
Cotton is well off the lowest % carry yield of the year, hedge funds have begun to reduce their record net shorts, but the market remains one of the most “Cheap and Oversold” market amongst the ags. These 3 indicators continue point to a bounce.
Digging deeper, let's look at the charts and see what the technical analysis reveals.
Technical Analysis
Cotton broke through the bottom of the declining wedge in mid-August and has advanced over 9% in the past 5 weeks. Cotton has plenty of blue sky ahead of it and could easily run another 10 points.
More Information
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The SpreadEdge Weekly Newsletter is published every weekend and provides a broad overview of the important seasonal, technical, and fundamental indicators within the Energy, Grains, Meats, Softs, Metals and Currency markets. In addition, spread trade recommendations and follow-up on open trades is also provided. For a free copy of the Weekly Newsletter, please send an email to info@SpreadEdgeCapital.com
Darren Carlat
SpreadEdge Capital, LLC
(214) 636-3133
Darren@SpreadEdgeCapital.com
Disclaimer
SpreadEdge Capital, LLC is registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is an NFA member. Past performance is not indicative of future results. Futures trading is not suitable for all investors, The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose more than your original investment. This is not a solicitation.
On the date of publication, Darren Carlat had a position in: KGZ24 . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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