Croker-Rhyne Co., Inc.

Main Page  |   Philosophy  |  Current Recommendations  |  Newsletter Archives
Contact Us

January 3, 2006

Welcome to the New Year

Number One Trade

Buy Cotton

After consolidating in a wide range for about 18 months, and having made several "false starts" during 2005, I believe cotton is on the verge of finally taking off on the upside. This IS a market that typically makes some pretty big moves and the simple fact it has been "doing nothing" (at historically low levels) for so long is one of the things that interests me. It doesn't hurt that world demand is running at a record pace, nor that China has been, and will be, a huge, huge buyer...or that it is quite likely international political pressure will soon be reducing various subsidies to the US cotton industry, thereby almost certainly reducing US acreage at some time in the future. While in my mind all of these factors have nothing to do with any specific day's or week's gyrations in the cotton market, I do look at them as providing an overall strong support for this market that is long overdue for a major bull move...I would also note that if the large Hedge Funds (which have become a major factor in the markets) suddenly find this market attractive, there is no telling how far it could go on the upside...There have been some amazingly large moves in commodities during the last few years and I don't think this is about to change.

I am buying the May and July 2006 contracts and look for at least a 20 cent bull move before July goes off the board.

Here are some charts and stats.... 


On the next table are the total ranges for every July Cotton contract, for the past 30 years,  between January 31st and the expiration of the contract in July...By total range, I refer to how much of a swing there is between the lowest trade and the highest trade of July Cotton...Note that in the past 30 years there is only one year in which that range was less than 10 cents...

        Total Range July Cotton in Cents Per Pound - January 31st to Expiration
                      1 cent move = $500 per futures contract 

Year 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
Total Range (high to low) 12.31 31.30 11.26 14.90 33.60 15.30 22.05 20.95 8.65 21.10


Year 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Total Range (high to low) 43.45 23.75 12.77 12.70 25.72 27.84 16.14 13.85 32.49 13.65


Year 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976
Total Range (high to low) 12.90 13.25 15.36 10.35 19.20 22.87 16.30 10.68 23.30 37.40
Comparing a few previous years....
In my November 18th newsletter, I compared the current market look to that of the 1994 and 1995 markets. Here's a repeat of that comparison as well as chart updates since then....
Futures trading oftentimes requires a lot of patience in that there are trades you can "see" are coming, but once you're on them, weeks and months can seem like forever, if, as in this case with cotton, it just keeps going nowhere. I looked back through my cotton histories and found a couple of fairly recent years (1994 & 1995) where cotton's action going into winter was virtually identical to what this year's contracts have been doing....moving sideways, then moving more sideways, in the process essentially becoming what I consider a "coiled spring". In these two previous cases, when they finally did start moving, the bull moves were more or less non-stop, moving up 25 cents in 1994 and 45 cents in 1995. This obviously does not mean the same sort of thing has to happen with the current cotton market but I do continue to look for, sooner rather than later, the beginning of a MAJOR bull move in this market and I do think the move could easily resemble what happened in 1994 and 1995....On the following four charts, compare for yourself those two July 94 & 95 contracts with the current July 2006 contract....You should be able to easily note the very distinct similarities between them, right down to the month by month "wiggles" as they wore out the most patient of traders....AND THEN TOOK OFF...
                                                     More Chart Stuff
Bottom line is I think the odds are high that Cotton is about to shift into a more or less vertical move to the upside. From everything I read, bullish expectations are virtually nil, or speak only in terms of the market being able to move up a few cents from here. I may be wrong, but I think this is a classic explosive situation where 18 months of going nowhere has put everybody to sleep....
There are numerous ways to do this...Using the Both Sides Strategy, using futures with options, using out of the money calls, etc...This market quietly moved about 2 cents higher in December, then gapped up today and closed 1 cent higher. I absolutely do not know if opening the year by making new two month highs is significant but I do "know" this market should be ready to do something big, one way or the other....If you are interested, give me a call, the sooner the better...
Here is one way to do it...using the May contract....
Or with the July...More expensive but has more time...
Bill Rhyne
Main Page   |  Philosophy  |  Current Recommendations  |  Newsletter Archives 
Contact Us