Cotton’s Breakout Poses Problems

We know many of you are rolling your eyes at the title of this post because you’re thinking, “I trade and invest equities; why should I care about cotton prices?” And you’re right; you generally shouldn’t care. But commodities matter to the broader market when they’re at inflection points, which may be the case for cotton. 🤔

Give us a second to explain, and we promise it’ll all come together…

Inflation has been on everyone’s minds for much of the last three years. Although most had hoped the Fed would be at its 2% target already, we’re not quite there yet. As a result, any major uptick in economic inputs like oil, copper, and, yes…even cotton is noteworthy as a potential headwind for inflation’s downward progress. 🔺

For the most part, commodities have fallen far from their 2022 peaks, but certain ones have bottomed and continued to trend higher.

For example, cocoa and orange juice were two of the best-performing assets last year, with soaring prices impacting companies’ bottom lines and consumers’ pocketbooks. And if you don’t believe us, just look at your last grocery trip receipt or listen to Hershey’s conference call, where cocoa prices were mentioned 12 times (more than double the previous quarters’ calls). 🫨

Right now, just a few commodities are rising sharply in tandem, specifically in the agricultural space. Poor crop conditions and trade route disruptions are the primary culprits so far. But if more join the fray, that pressure on inflation (and profit margins) could reemerge.

That’s why we’re keeping an eye on cotton futures, which just broke out after trading sideways for the last eighteen months. Technical analysts like to say, “The bigger the base, the higher in space,” which would suggest a lot higher prices to come in this market. 📈

To summarize, if you’re a trader, a meaningful breakout in cotton appears to be ripe for the picking. And if you’re an investor/trader who likes keeping tabs on inflation and the Fed’s next move, add this to your list of charts to check in on occasionally. Because nothing says “soft landing” like rapidly rising commodity prices.

We’ll see ourselves out after that one… 🤦

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