We were early selling December lean hog futures in September. Our expectations were based on solid technical resistance that had built up near $0.645 per pound along with an early onset of seasonal weakness. Fortunately, our protective stop kept the loss manageable. December hog futures continued to climb through September. The mid-September head fake didn’t fall far enough to to actually trigger a sell signal but it did fall far enough to setup a bearish divergence pattern triggered by yesterday’s price action. We’ll briefly review the premise for the current hog trade while illustrating the power of divergence analysis supplemented by the Commitment of Traders report.
This week, we took a step back and looked at the markets in groups. We focused on the metal and meat markets in general while only discussing specifically, a soybean meal trade.
Re-Shuffling the Metal Markets which we wrote for TraderPlanet focused on the growing commercial trader position in the precious metals. There’s no question they’ve been big buyers on the recent decline and their total positions are controlling a larger percentage of open interest with each additional contract they buy.
See our mechanical Soybean Meal program’s Equity Curve
We ended the week with a broad outline of the interaction between commercial traders and seasonal analysis in hogs and cattle. We featured the current seasonal charts by Moore Research and combined them with our own Commitment of Traders charts to demonstrate effectiveness of these tools when combined.
See all 9 charts and commentary in Hogs and Cattle Bottoming Out.
See the equity curve for the Meats Sample Portfolio.
The United States is home to the largest and most liquid investment markets in the world. There’s hardly a market one can think of that isn’t exchange listed. This has made the United States the primary destination for excess global capital placement whether it has gone towards the relative safety of government bonds or been more aggressively allocated towards stocks, ETF’s or even the futures markets. The final destination of the investible funds is less important than the singular characteristic that all these investments have in common. They’re denominated in US Dollars and the Dollar’s value may be more meaningful than the underlying asset class.
Investment securities are not protected from the vagaries of their underlying currencies. Therefore, globally allocated investments owned in US Dollars can lose money in a flat market if the Dollar declines. The Dollar peaked in early July and has since fallen by more than 6%. Therefore, if your US equity portfolio hasn’t gained more than 6% since July, you’ve actually lost money. The Governmental shut down has accelerated the recent slide and pushed the Dollar to a new 30 day low for the second time this week. This is only the second time since May of 2011 that we’ve made multiple 30-day lows in the same trading week.
Perhaps more troubling to global investors than the currency-based loss is the fact that the traditional safe haven investments, even in Dollar terms, have not behaved as expected. The primary relationship between the Dollar and the US equity markets since the financial implosion of 2008 has been negative. This has been embodied by Dollar rallies on stock market declines. Very simply, foreign capital gets converted to US Dollars and placed to work through buying declines in the stock market. Conversely, when foreign investors take profits in a rising stock market and convert back to their base currency, the Dollar falls.
We also see this relationship play out in the gold market. Economists on TV tell us to buy gold as a defense against a declining US Dollar. Sensationalists point to the overwhelming debt being created by our country and tell us to buy gold because our country is on the verge of implosion and our currency will become worthless. Speaking of correlations, it’s amazing how many of the people saying this are the ones selling gold investments. Astute investors would notice that the correlation between these two markets has been trending upwards since early June. This means they’re moving in the same direction more frequently rather than opposite each other as expected.
Foreign purchases of US goods have always been Dollar dependent. Every nation and agricultural enterprise within every nation is forced to tie their commodity purchases accordingly. Therefore, it becomes especially disturbing when a weaker Dollar fails to attract foreign purchases of global staples. Beginning in August of 2012 we started to see the commodity markets decouple from the US Dollar. Wheat was the first market to be sated. Corn followed suit in October of 2012 and hogs joined the new normal last November. This means that even base foreign needs have been filled. Therefore, they are more likely to trade in the same direction as the Dollar going forward rather than the typical negative correlation that we’ve seen from bargain hunters looking for inflation in the commodity markets.
The International Monetary Fund (IMF) stated that world Consumer Price Index (CPI) came in at 3.2% year over year for August. This is down from 4.9% a little over a year ago and ties in rather neatly with gold’s last run at $1,800 per ounce early last October. The US unemployment rate is generally believed to be artificially low in the as reported number of 7.3% and Gross Domestic Product (GDP) here in the US came in at a very tame 2.5%. These statistics, combined with a low global industrial capacity usage number suggest that inflation is nowhere near. Furthermore, the Federal Reserve Board’s recent decision not to implement a tapering of the $85 billion per month in economic stimulus reinforces the notion that their primary concern is deflation, rather than inflation.
Many economists believe that we may be near a tipping point in the bull run that has followed the economic meltdown of 2008. The obvious concern now lies in the protection of the wealth that’s been garnered during the recent run. Clearly, the ownership of alternative investments isn’t going to play out the way the pundits have suggested. Therefore, investment vehicles that will profit from a decline in both asset value and currency depreciation should be seriously considered. These include inverse ETF’s as well the futures markets, which will allow the seamless execution of short trades including currencies. Equity futures spreads selling small caps like the Russell 2000 and buying big caps like the S&P500 are also a good idea when expecting volatile, downward markets. Remember that cash is only king as long as the King’s throne isn’t sinking.
This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.
Today’s price action appears to have trumped the
deflation/reflation argument that has been building over the last month. Many
of the markets have been rallying on small speculative buying as seen in the portfolio
rebalancing by the major long only funds.
Looking at the Commitment of Traders reports over the last
few weeks, we can see an increase in the net long positions of small
speculators in the following markets:
Swiss Franc, Japanese Yen, Canadian Dollar, Unleaded Gas,
Wheat, Beans, Bean Oil and Meal, Corn, 10yr. Notes, Eurodollars, Live Cattle,
Hogs, Copper, Orange Juice, Coffee, Sugar and Dow Jones futures.
The commercial hedgers have gladly stepped in to take the
short side of these trades with their numbers building as we’ve neared the
October – November resistance in many of these markets. Obviously, the interest
rate sector is the exception, although, there is strong short hedging taking
place at these levels.
There are a few major reasons for the resistance at these
levels. First, the U.S. Dollar Index has a strong bias towards setting a high
or low for the coming year in the first two weeks of January. If the Dollar’s
trend is going to be higher, the global demand for American commodities will
decline. Secondly, portfolio rebalancing by the major index funds for 2009 is
going to balance smaller gold weighting against heavier crude oil weighting.
Today’s collapse in crude oil futures is an indication that they may have filled their
need for crude. This also helps explain Gold’s inability to rally through $900
even on weak U.S. Dollar days. Lastly, the economic numbers continue to get
worse with each release. Last week’s ISM numbers were the worst since 1980.
Unemployment this Friday should continue to rise and eventually head north of
This is a very brief outline of the weakness I’m expecting
in many markets in the near term. Please call with any questions.
Hurricane season has brought about some unintended
consequences which are my job to find as a commodity broker. The one least likely to make the news is their effect on hog and
cattle prices. Every time people are forced to flee and cities lose their
power, we see a rally in meat prices. Loss of power creates a temporary demand
shock to the system. Every individual and grocer has to trash every piece of
meat in their home or store.
This didn’t actually hit until the blackout in August of ’03.
I was prepared for the stock market’s initial sell off followed by a huge rebound
based on the public selling the market off on the terrorism fears and buying it
back with a vengeance when it was ruled out. That trade lasted from Sunday
night until Tuesday morning, just as I planned. However, over the next week and
a half, I watched the hog and cattle markets climb and climb. At that time, I
didn’t have the forethought to forecast the demand shock of the replacement
value of all of the perishable goods.
Hurricane Date Change Hogs Change Cattle
Floyd 9/16/99 11% 11%
Blackout 8/14/05 17% 28%
Isabel 9/18/03 19% 9%
Ivan 9/16/04 7.8% 2%
& 8/05 4.5% 9%
Rita 9/24/05 5% 3.5%
This morning’s trade will most likely, send all asset
classes lower. Obviously, this will include the commodity futures markets. Take
advantage of this morning’s weakness to establish long positions in perishable markets