The Softs Pit Review
For the week of September 20th, 2010
Looks like an interesting week ahead for the leaders. Been in bull markets in several key components of the Soft complex. Coffee, sugar and cotton prices have all staged nice rallies. Coffee may have paused, and the trend may be changing. Problem is now too many bulls are fishing off of the same side of the boat. So the big question is how much further can and will they go?
Already cotton prices are above $1.00 (this morning), a level that they have reached only three times previous, in 1995, 2008 (synthetically) and way back in the1860's during the Civil War. I fully expect to see 105, but whether it can achieve much beyond that needs to be seen. Remember, the funds have fueled much of this move even with positive fundamentals on the supply side. The big thing at work lately is the impact of the large unfilled "cotton on call" levels. They seem to just keep fueling the move. As prices start to back off, buying to cover shorts enters in. The large long position held by funds however makes it a matter of "Katy bar the door" when it becomes time for the funds to exit. So owning puts may prove a useful strategy to protect aggressive longs.
Coffee prices remain close enough to $2.00 that it seems my long term objective of 208 is just a matter of time. Yet for the past few weeks I have regularly mentioned how this market feels heavy to me. I continue to hold onto my objective, but feel a violent drop (can and will) gain momentum if given technical help. For instance a break below 185, or 182 in KCZ could feed on itself. So again longs should be wary. I'm not saying it'll see a drop to 175, or 165, but hey stranger things have happened.
Sugar too looks headed for 2650, and this morning SBV has already reached 2560. I remain a friend to the long side, but as mentioned previously, "never marry a position." Exchanging vows with a position can only lead to an ugly divorce. Owning downside protection via puts may be costly, but it may also prove a prudent prenuptial agreement.
I seemed to have missed the boat on my desire to take a long sided stab at the Cocoa market. I had been considering a strategy of buying calls or call spreads in an effort to bottom pick the market. I failed to act not finding anything attractive from a risk reward standpoint. Cocoa values will now attempt to prove they belong above 2650-2700.
So it seems prudent at owning downside puts as disaster insurance for longs is something worthwhile to consider among the several key bullish leaders in the Soft complex. So while I am not suggesting that you get short, I do want longs to think of exit strategies.
Markets receiving some selling since early openings, perhaps option related.
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