We wrote here at Equities.com on June 30th that we thought cattle were finding support in, “Cattle Finding a Bottom into Summer.” Over the last six weeks however, commercial traders have come back to the market on the sell side. Based on the commercial traders’ deteriorating evaluation of the fundamental picture along with the clear technical signals, we’re not only exiting our longs; we’re going short October live cattle.
Crude oil touches nearly every part of our lives throughout the day. The more we do, the more we use. This is what makes crude oil such a valuable economic forecasting tool. This week, we’ll look at the big picture in crude oil using technical, fundamental and spread data to explain what the market is telling us as we head into the summer months.
There is a major battle brewing between the bulls and the bears in the metal markets. Arguments on both sides are full of conviction and weight. Even more importantly, traders are putting their money behind their conviction. Finally, as the action has heated up, it’s drawn players from both of their respective camps into the fray. This week, we’ll look at the gold market and one of the problems with the Commitment of Traders report’s data.
The precious metals markets have picked up steam fueled by negative interest rates and poor stock market performance. We’ve discussed the dislocations governmental policies can create within the markets extensively since the economic collapse and the new era of Economic Engineering at length in the past. Briefly, in a negative rate environment, investors feel more secure owning something that may be worth more in the future, like gold, than owning something with a guaranteed decay, Japanese bonds. This is not the place to argue storage and insurance versus the cost of the negative rate or, currency valuation versus the appreciation of goods owned. The economic theory is sound over the long run. However, we’re here to make money in the short-term and the long-term. Therefore, we see the recent rally in gold as being fueled by those late to the party. Frankly, anyone who bought gold above $1,100 per ounce may be in for some pain if they don’t lock in profits.
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.
The Euro currency was in free fall for nearly a year as the world thought it was heading to parity with the U.S. Dollar. The further it fell, the more they talked about it. Parity appeared to be right around the corner. However, the market’s internals began to re-balance themselves as the commercial traders stepped up to defend even money to the tune of a new net long record position being set as the Euro currency traded down to $1.05 vs. the U.S. Dollar. This is when things got interesting.
Lean hog futures are down about 30% from this time last year, falling to $.57 per pound in the December contract on July 13th. The recent rally has bumped prices nearly 13% off the July lows. Based on technical, seasonal and fundamental resistance, we expect this rally to fail and hog prices to decline through the end of October and possibly through year’s end.