SpreadEdge 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

There are several indicators that point to a bottom in Cotton prices.  These indicators include the current price action, hedge fund position estimates, % carry yield, and relative price and position.  Each are described in more detail in the following sections:

Current Price Action

Cotton has been in a steady decline since late February of this year.  From the high on 2/28/24 to the low on Thursday 8/8/24, Cotton declined over 35%.  On Friday, Cotton peeked out of the declining wedge and is likely to bounce higher once it convincingly breaks through this level.

Hedge Fund Position Estimates Overview

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. This information aids traders and analysts in comprehending market sentiment and developments.  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.

Cotton was at its lowest hedge fund position estimate at the Tuesday 8/6/24 close with a record low (52,850) net contracts (actual net short contracts was (54,942) based on the CFTC report published on Friday).   Hedge funds have now add nearly (150,000) net short contracts in just 5 months.  This is the lowest level reported in the past 5 years.  The last time that Cotton had < (50,000) net shorts was 8/6/2019 exactly 5 years ago as of the Tuesday estimate.   Below is the chart from this period in 2019:

Note that Cotton rallied over 21% from the 8/6/2019 close to the peak on 1/13/2020.

% 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.

Cotton has % carry yield of (6.8%) and is just off the lowest level of (7.3%) set 2 weeks ago.

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.  

Relative price and position confirm that Cotton is amongst the most “Cheap and Oversold” markets in the agriculture complex.  Cotton has been at this extreme level for several weeks and should begin to move back to more normal levels.

To Trade Cotton

The SpreadEdge approach is to trade calendar spreads based off of historical seasonality.  Cotton has historically been a “sell” during this time of year so I will not be recommending a long calendar spread in my client accounts or in the Newsletter.  However, I plan to place an outright “buy” in a personal account.  I will use the December contract because the October contract has extremely low open interest.

More Information

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

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Darren Carlat

SpreadEdge Capital, LLC

(214) 636-3133

Darren@SpreadEdgeCapital.com

www.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.