APRIL 29, 2019
IS IT TIME TO GET LONG HOGS?
Wow! Has the Hog market given us a good ride or what?
For weeks news of African Swine Flu circulated around the Hog world yet the market seemed oblivious to the situation until March 7. Then all of a sudden BOOM June Hogs went from a low on March 7 of $74.80 to a high on April 5 of $99.82. Then the market consolidated at high level approaching the $100.00 mark, and is now in a period of retracement.
In my article of April 17 I wrote, “On Friday, March 29 this model showed the positive indicator for hogs had reached SEVEN standard deviations above the 187 week average, this reached a point of negative equivalency. This means that the market had moved so far so fast that while the positive indicator was traveling higher at warp speed it was pushing the negative indicator lower. This happens in only the most bullish or bearish markets. This also tells us as the indicators separate to extremely wide points there is a very high probability for a corrective move.”
I went on the say, “While the market has experienced a slight corrective move from April 5 to yesterday April 16, the positive indicator is still over two standard deviations above the 190 week average. It is my opinion that while we can still go higher any short term upside move is limited. It will take a greater break in the market, perhaps another $7.00 to $10.00 break to put the market back in balance and prepare itself for the next thrust higher.”
As of this writing the market has corrected its overbought condition. On Friday April 26, both the in-house indicators were once again within the first standard deviation of the 192 week average. This correction has taken four weeks to complete which is quite normal given the degree the market was overbought. As we know the market can always go lower or higher than one anticipates but I am of the opinion it is time to look for levels to buy.
It might be worth a short review of the main fundamental factor pushing hogs. Over the weekend the BBC ran a great article on just that. Here are some of the points the article made.
• The epicenter of the current crisis is China, the world’s biggest producer and consumer of pork. It alone accounts for more than half of the world’s pig population. In addition to the outbreak in China, there are also now reports of the virus in Vietnam, Laos, Cambodia, Thailand and other countries in Southeast Asia.
• China is struggling to contain the disease, which has spread to every part of the country since August last year.
• After months of claiming the situation was under control, Beijing is now warning that pork prices in China could rise by more than 70% in the second half of this year.
• China’s National Bureau of Statistics says the country’s pig population has fallen by nearly 40 million to 375.3 million from a year earlier, because of the swine fever outbreak. If a single pig is found to test positive for the virus, the entire herd has to be slaughtered. Farmers usually suffer substantial financial losses in the process.
• However some analysts believe that China has been under-reporting the situation, partly due to local farmers withholding information about outbreaks.
• Looking ahead, the epidemic could decimate around 200 million pigs in China, according to a grim report by Rabobank.
• It forecasts that China’s pork output will fall by 30% this year, creating implications for global commodity markets.
• China is, however, trying to boost pork imports from another big producer – the US – to make up for its lost domestic supply. There’s just one problem – President Trump’s trade war.
• US pork exports to China are currently facing tariffs of 62% because of the continuing trade dispute between both countries.
• The usual tariff rate for US pork exports to China is 12%, but an additional tariff of 50% was added last year due to their spat, making American pork significantly more expensive for Chinese consumers.
• Rabobank’s Mr Sherrard calls their current trade tensions an “unwelcome complication”, but predicts the pork shortage could lead to an accelerated deal between the two sides.
• “In the end, we will see that there’ll be some sort of temporary, or maybe even a permanent, resolution of the trade dispute to try and get that pork meat and other animal proteins flowing from the US to China,” he says.
Given the aforementioned technical and fundamental information I will be looking to recommend long June Hogs. My initial recommendation as carried in “Trades of the Week” for week of April 29, 2019 is buying at $87.70. Acknowledging the market can always go lower than expected before turning around I will be suggesting the use of stops.
If you have any questions for me you can call Lee Gaus at 877-304-1369, or email me at lee@efggrp.com.
The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.