Saturday, August 2, 2014

Cotton On? Why I love looking at horrible charts

After my post on Soybeans, I saw this great post by The Short Side of Long. When it comes to spotting contrarian ideas, I think no one does it better than Tiho.

I think he did a fantastic analysis of cotton, and I would urge anyone that likes to look into the brain of a contrarian to read his full analysis and his commentary. He correctly alerted me to Russian stocks during the Crimean crisis, which I bravely took and made a handsome 20% profit  from that trade in a few short months. He is a formidable contrarian trend spotter that does thorough research on his ideas before presenting them.

His main points are:
1) Cotton prices have plunged in the past 3 months
2) Prices are 2 SD away from the 50 day mean
3) Prices is down 13 out of 14 week
4) Performance is 2 SD away from rolling 3 month performance
5) Prices are very far below its 200 DMA
6) Market positioning shows few bulls and many bears
7) Market sentiment shows the exact same thing
8) Seasonality is pointing to a bottom

I have to say that I agree with his analysis and it is extremely hard for me to look at any of the evidence and want to go short, except for the irrational argument of trend following after a huge move has been made.

I have gone 1 step extra from Tiho and found something that strongly supports higher Cotton prices, and that is the severe drought happening in the US now. The US is the 3rd largest Cotton producer and Texas produces 25% of the Cotton in the US, and guess what? Massive drought.

I think it is quite clear to see how Cotton might be affected. Will the harvest be poor this year? Who knows. I do know that the Cotton market is significantly more affected by this drought compared to Soybeans because different states are involved in the farming of the 2 produce. Soybeans are farmed in the Mid and North of the US, while Cotton is grown along the South border. Only a few Soybean states are affected by the drought, while half the Cotton states will be affected.

Anyway, since he is much more prudent than me, he is waiting for a clearer trend reversal signal before he initiates his longs. I will monitor Cotton closely, perhaps maybe even initiate a buy soon? Commodities look unbelievably cheap to me since the broad correction that has happened to agriculture since the massive Q1 rally. Perhaps even a buy in a broad commodity index!

Any thoughts on commodities? How do you guys get your exposure to commodities? Or is it something that is just not traded by you?

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