April 20, 2015
Cattle Market Collapse Under Way?
The most interesting aspect of a bull market that has turned into a bear is that as prices shift into a downward gear, you generally find NOTHING to support the idea that prices will continue lower. To the contrary, even though the bull move is totally OVER, everything you read will be a rehashing of VERY bullish old news and fundamentals that WERE driving the market higher, and all of that stale commentary will be accompanied by opinions that the latest price drop is only a “correction”, or “pullback”, and of course, “a buying opportunity”. But none of those are true and those sentiments are only an explanation of what already HAS happened (the past) and have no connection to the future…which is precisely what we are trading here…The Future.
I MAY BE DEAD WRONG BUT I CONTINUE TO AGGRESSIVELY BELIEVE THE CATTLE MARKET IS IN FOR A MAJOR SHOCK. Just as we have seen in virtually EVERY major commodity we trade in recent years, WHEN A BULL MARKET HAS ENDED, HEAVY PERCENTAGE SELL OFF ARE ALMOST THE NORM IN FUTURES. This is evidenced by the following list I inserted in a bearish Cattle commentary I published on February 5th…Right before the Cattle markets were once again ready to rally in my face again…But the most recent rally seems to have failed and I firmly believe the odds are sky high this was their LAST rally before the true price collapse begins.
In recent years, we have seen commodity bull markets end in the following fashion:
Corn – down 60%
Wheat – down 44%
Soybeans – down 50%
Gold – down 40%
Silver – down 70%
Copper – down 48%
Cotton – down 70%
Crude Oil – down 60%
Unleaded Gas – down 60%
Natural Gas – down 50%
Sugar – down 60%
Coffee – down 65%
Lean Hogs – down 50%
So, I’ll say it again…That list encompasses just about EVERY major market we trade….with the SMALLEST decline having been 40%...So WHY should Cattle be ANY different?
So far, Both Live Cattle and Feeder Cattle have only come off about 10% from all time highs. Even if Cattle don’t match the 40% mark, I will note that even if they only take a 30% hit, you are still talking about 120 on Live Cattle and 170 on the Feeders…and I see ZERO reason not to expect those numbers.
This business is not for wussies. Sometimes being wrong and losing can be BRUTAL. Sometimes it can take more money and patience than many people have the stomach for, but part of this game IS being able to stay with an idea when you think you are right, but the market keeps saying you are wrong…and beyond that, THEN to be able to STAY on the trade when it does start going the right way.
I am absolutely, totally, unequivocally staying short the Cattle market. I truly think the big one is dead ahead…that the odds have gone way up that the most recent rally failure (see chart below) is the beginning of the non-stop down draft I have looking for since last year…And if you can stay on it, there is some fairly major money to be made…It should go without saying but I am morally obligated to do so, but it I am wrong, it can also mean losing everything you might possibly invest.
I ASSURE YOU IT IS MEANINGLESS BUT I AM MORE CONFIDENT THAN I HAVE EVER BEEN IN THIS TRADE THAT WHAT I HAVE BEEN PREDICTING IS ABOUT TO BECOME REALITY…NEVERTHELESS, I WILL CONTINUE TO USE THE 1 CALL + 1 PUT COMBINATION TO TAKE MY BEARISH POSITIONS…AS I AM EVEN MORE CONFIDENT THAT SIDEWAYS IS LAST THING WE WILL SEE IN THE COMING MONTHS…As bearish as I am, I do respect there can always be “one more rally”, and as little as I am expecting one, I still want to be “whole” if one does come…and the 1 & 1 offers me exactly the protection I might need…as well as PLENTY of leverage if I am right.
For some historical perspective as to how this market does trade, here are some bearish Feeder Cattle moves during the past decade or so…As you’ll note, some have rallies…some almost have none…
“And the bigger they are, they harder they fall” can also be true in Futures. Today’s current Feeder Cattle market, even after it has come off a bit, is still in the TRADING STRATOSPHERE and when it comes to market tops, I have learned to not rule out anything as to the size of downside moves that can take place in this business..i.e., just look at Crude or Hogs most recently…and I am not just throwing numbers out there when I say I think Feeders could be down 30% (60 cents) from HERE before August goes off the board…It IS the nature of the beast…As I have written for years, the Meats almost routinely make some of the most stupidly big, fast moves you will ever see in the futures arena…And all things considered, I think right now is the perfect time for a new incredible example of what they can do. AGAIN, I THINK THE BULLISH CATTLE STORY IS ABOUT AS OLD AND STALE AS IT GETS IN THIS BUSINESS…AND IF COMMODITY HISTORY IS ANY GUIDE AT ALL, I BELIEVE CATTLE ARE SEVERELY OVERRIPE FOR A BIG TRIP TO THE DOWNSIDE.
Here’s the 1 & 1 I’d use at current levels…Option prices include all fees and commissions.
Here’s the long term…I think anyone who is still bullish this market is ignoring the reality of how the commodity GAME works. This stuff goes UP BIG and DOWN BIG…Why it ever does what it does is totally beside the point…IT JUST DOES.
One more thing…and I’ve referenced it before…but I do believe the Hog market (which competes with Beef for market share) is also flashing a warning sign for Cattle…and also represents an up to the minute with respect to my observation that the Meats can make some stupidly big moves…
Plain and simple, if you are not in this, I think you should be…especially if you have already been on it short…and got “stung”. Hard to do…I know…but you get back on it.
Contact me if you are interested…I think this one, and a few others, are truly ready to crank it up.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Feeder Cattle