US cotton futures tumbled 3 percent on Tuesday, the most in a month, after a long and heavy buildup in bullish positions by speculators fearing tight supplies in the fiber. Traders said the market, which had hit six-month highs on Monday, could drop further in the near term before regaining strength.
"We've been in an uptrend since November and today we broke that trendline, triggering a lot of stop-loss selling," said Jobe Moss, cotton broker at Moss Capital Management in Lubbock, Texas. "I'm bearish myself and I think this market may have very well seen its top. But the price keeps going up, so we could recover after some losses."
The most-active May cotton contract on ICE Futures US fell 2.75 cents, or 3 percent, to a February 7 low of 86.55 cents a lb. It was the contract's sharpest drop in a day since January 27. In the previous session, May cotton rose as high as 90.44 cents, marking a peak since August 20, before closing at 89.30. On Tuesday, the market opened flat but tumbled soon after.
Many were surprised by the sudden reversal as there wasn't any major fundamental news or data to trigger the selling. Some speculated that a drop in the US consumer confidence for February, along with slower gains in domestic home prices in December, could have been a factor that weighed on cotton, an industrial commodity.
But Sharon Johnson, senior cotton analyst at KCG Futures in Roswell, Georgia, said the market was clearly overbought and players were beginning to fear it could not hold near the upper end of 90 cents/lb. Johnson cited a buildup of more than 10,700 new speculative net-long contracts in cotton over the past two weeks, according to figures released by the Commodity Futures Traders Commission. She said open interest in May cotton also rose by a staggering 2,400 contracts on Tuesday alone, indicating a further buildup in longs.
"What we've seen today is long liquidation. We made new highs above 90 cents yesterday but we couldn't hold above those levels. Some of those who bought yesterday were chased out early today and we continued hitting stop-loss orders." Cotton was one of the better-performing commodities of 2013, gaining 13 percent mostly on a November-December rally, after a pickup in US sales cut sharply into inventories. The market had started out strongly again this year, rising 6 percent year-to-date until Monday's session. It is up about 3.5 percent now, year-to-date.
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