October 29, 2007

 

Traders plot strategy in search for CME hog market floor

 

 

Traders and market pundits are pulling out all the stops in their search for an elusive bottom in a Chicago Mercantile Exchange hog market that is camouflaged by unrelenting bearish fundamentals and a seemingly deeply-oversold technical indicator.

 

"Every time we try to get these things (futures) moving up, somebody comes in (to) pound the heck out of them," a hog brokerage firm's trader said. "That's been going on for more than a week, and I don't see a break in that trend until we have something to hang our hats on."

 

Pork futures earlier this year climbed on soaring corn prices that were expected to constrict hog production. In mid-July, bullish speculation also entered the CME hog pit that China was interested in US pork because of escalating domestic pork prices spurred in part by widespread swine disease problems.

 

After peaking at highs in early August, CME hogs nosedived as US pork production continued unabated. Industry sources attributed the setback to prolonged producer profits that offset increased feed costs. That development, they said, not only yielded larger-than-expected hog numbers throughout the summer, but record autumn supplies as well.

 

China, which some had counted on to help absorb the US pork windfall, also bought less than half of the 100,000 metric tonnes of pork from the US than expected because of disputes over ractopamine  -- a chemical used to promote meat leanness in hogs. In September, a Chinese government official declared the country's rising pork costs had stabilized and were declining as hog herds recover.

 

The prior spot-month October contract settled at 57.62 cents a pound when it expired from board trading on Oct. 12 versus its 77.70-cent high on Aug. 3. December futures, the new lead-trading month, on Wednesday closed at 55.35 cents, down sharply from its early August top of 74.72 cents.

 

The futures price tumble since late summer depressed and held the nine-day relative strength index to well under the 30% level, which is widely considered an oversold market condition that speculative traders key in on.

 

CME hog contracts have since moved sideways, stirred by the conflict between deteriorating cash hog prices and tempting RSI conditions that speculators find difficult to pass up.

 

During the past week alone, December and February hogs established a consistent pattern of opening spikes driven by bargain hunters that ultimately wilted under the pressure of nagging fundamentals.

 

Don Roose, analyst with US Commodities, said of CME hog's current dilemma: "It's not over until it's over, and so far the bottom is yet not in sight."

 

Futures look for support at lower price levels, and if no support is found, then the market moves on to the next lower level and the process repeats until a technical floor is found. Without a technical floor, participants will have to count on a fundamental demand rebound for relief, he said.

 

Roose said traders who use the relative strength index as a tool to gauge how oversold the market encounter problems because the chart actually reflects the true bearish nature of the market. Those traders, he said, feel trapped because relative strength has crashed.

 

Joe Kropf, analyst with Kropf & Love Consulting, said there are no easy answers for solving the hog-bottom mystery as people weigh whether bearish fundamentals are the leader or if relative strength holds the key.

 

Some traders may be waiting for the hog market to stabilize before deciding whether to buy, said Kropf.

 

A veteran hog trader said two trading mistakes people make are trying to pick a bottom and trying to pick a top. Sometimes, he said, the smartest move is to stand on the sidelines and observe from a distance.

 

Relative strength barometers over the years have been known to drop to extremely low levels, which was the case during the 1998 hog market crash, the trader said. The way the RSI is put together, it can go to zero but the market ignores the formula and losses more ground, he said.

 

The trader is tracking cash hog prices and wholesale pork cutout values for upward consistency, as well as waiting for a key market reversal. That is when bearish attitudes drive futures lower on the open, make a new low for the contract and settle above the previous session's high on "good size" volume.

 

"I'm not sure if you're going to get a turnaround, but you're looking for a bounce here," the trader said. "But, if you do get a turnaround it's going to be based on the fundamentals and certainly if I see a key reversal I'm going to follow it."

 

Traders and analysts warn, however, of December hog future's historical notorious reputation for being "the worst month on the board" to trade. That criticism may be somewhat warranted given poultry's dominance for holiday meal preparation and pork's appeal during the winter holidays that is typically limited to hams.

 

Furthermore, three-day weekends during the Thanksgiving, Christmas and New Year's holidays typically back up supplies on swine farms causing a drag on cash hog prices, said market observers. They said that situation this year will be exacerbated by ramped-up pork production.