Updated: May 22, 2024
In my quest to offer you the best information and resources available on the cotton market, I will be doing doing a series of posts about the various #reports that we use to understand and predict the futures markets. For this first post, we are going to talk about #seasonals.
Seasonals are one of the most useful reports that we can look at in the #cottonmarket because they follow a logic, and they are directly relevant to price, but they do have their limitations. Let's go through what a seasonal is and how it works, and then we will come to what it means and how to use it.
A "seasonal" can refer to any type of chart with the data overlaid one year over the other. This allows us to see how the current year compares to previous years. and is particularly useful in analysis if the underlying data has a standard behavior according to the year.
GCA Stocks Seasonal
#GCA #stocks for example, follow a seasonal pattern based on the flow of #imports into the USA primarily driven by the harvest periods of its key cotton #export partner #Brazil.
There are numerous relevant charts that we look at in cotton seasonally because of the seasonal nature of the cotton harvest. For this reason, I include seasonal annual overlays of the date in almost all of my free and premium reports to show how the data compares to previous years.
Robusta Cert Stocks Seasonal from CTA Daily Cert Stocks Report
Price Seasonals
Although we can look at any type of data seasonally, when we talk about "seasonals" in cotton we are very often referring to the #priceseasonals. Price seasonals are an attempt to identify how the #futures price behaves seasonally.
Price Seasonals are constructed very simply, they are just an average of #cotton prices for every day (or week or month) of the year. So for example if you average the price of cotton on every Jan 2nd for the last 50 years, every Jan 3rd from last 50 years, Jan 4th, etc. That will enable you to string them together and create a price seasonal chart.
Cotton Seasonal Chart from CTA Weekly Seasonals Report
The number of years that we use to create our seasonal chart is also an important factor. When we are making that determination we are balancing two competing factors: recency vs consistency.
We weight consistency in our report by using as much data as possible. Using many years will enable us to average out anomalies and capture as many of the "typical" years as possible.
Against consistency we have to consider recency. The cotton world is not static and we don't want to over emphasize a phenomenon that was important 40 years ago that is no longer relevant today nor do we want to miss a new phenomenon that has been very consistent for the past 5 years. To do this we drop off old years and try to focus on a more recent data set of say 5-20 years.
In my reports, I also use a method that I call Front-Weighted Average. This is where I average the prices for the last 5 years, average the prices of the last 10 years, average the price of the last 20 years, and then average those 3 averages together. What this does is it weights the prices of the last 5 years 3 times as heavily as the back 10, and the 5-10 year prices 2 times as heavily as the back 10.
The purpose of this is to capture consistency and recency. All prices for the last 20 years are captured, but the most recent years are given more weight. In my weekly seasonal report, it looks like this:
Section from CTA Weekly Seasonal Report showing Front Weighted Average
Using the Seasonal Report
Generally speaking, the way to use a seasonal report is to identify what is the underlying inertia of the market. In other words, if nothing else is going on, what would we expect prices to do.
The seasonal can be a really powerful predictive tool in this way, because many times not much changed over the course of a given week and the market may very well default to the seasonal expectation. However, the seasonal is most relevant as a predictive tool in this way for specific points in the season.
With cotton prices, the seasonals are dominated by Brazil, the world's largest producer of cotton. There is a period in Jun-Aug where there is #frost risk, and so we typically see a strong #bullish seasonal in that period. A little before the frost season is the beginning of the #harvest in #Brazil, where we usually see some hedging pressure from exporters so that is typically a strong #bearish seasonal.
This is why in the front of my seasonal report, I show how strong the seasonal is right at the top of the report. Each week is ranked 1 out 54 (52 weeks in a year, plus an extra week on either end to account for the staggered starting dates of the year). Plus there is a z-score calculation to show what the strength of the week's seasonal is compared to the distribution of all seasonals.
Top Section from CTA Weekly Seasonal Report
While price seasonals are useful tool in your trading and analysis toolbox, use them cautiously. If you are going to trade seasonals, you are playing the averages so you want to do small volumes repeated many times.
Remember that a seasonal works best when nothing else is going on, and it can lull market participants into a passive, unthinking position when the market is quiet. Cotton being cotton, it doesn't stay quiet forever, and if something is going on then the worst place to be is on the wrong side of the market with everyone else.
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