June 22, 2015
I continue to believe Cattle topped 8 months ago…
and that their next major move is SERIOUSLY LOWER
And maybe you are sick of reading this
but I do think this trade has monster potential…
My very distinct sense, drawn from what I read and what I hear from people in the cattle business, is that everybody is STILL thinking Cattle are in a bull market…and maybe they are, maybe I am dead wrong about everything I express here…But I would caution anyone who is in the bullish camp (everybody I know frankly) to be aware that this notoriously volatile market did makes its high tick 8 months ago, and HOWEVER bullish the inventory numbers supposedly are, Cattle appear to have been doing nothing more than building a giant top since last October…AND I CONTINUE TO REGARD ANY SIGN OF WEAKNESS AS POTENTIALLY THE BEGINNING OF A SICKENINGLY BIG (FOR CATTLE PRODUCERS) SELL OFF.
In the futures markets, WHATEVER the commodity, absolute price collapses following big bull moves are ROUTINE…and as I keep repeating here, I have NEVER seen a bull market top that wasn’t accompanied by anything but bullish news and bullish “expert” opinion…So if you ARE in the cattle business I strongly recommend NOT getting too comfortable with the market here. Don’t let the fact that prices haven’t gone down put you to sleep.
I’d also say that the lately extremely popular idea, “Now that everybody is holding back heifers to rebuild the herd, prices HAVE to stay strong”, is probably nothing but another classic commodity “trap”, just one more example of how all the “logic” points in one direction, but the market ends up doing exactly the opposite. I KNOW the heifers-being-held-back argument seems to make bullish sense but at various times in my 35 year career, I also distinctly remember periods lasting YEARS when all that cattle cycle stuff was supposed to be bullish for prices…but all they did was go lower and lower…and lower. Disastrously so a few times.
And just to remind you (again), do take note of all the commodity bull markets gone severely bearish in recent years…Look at Hogs, -56%. Look at Beans, -50%. Look at Wheat, -52%. Look at Corn, -62%. Look at Crude, -60%. Look at Gold, -41%…Look at pretty much every commodity on the board and think about how TOTALLY, TOTALLY BULLISH their “fundamentals” were in recent years as they reached insanely high levels…and what happened to all of them. I say Cattle are next.
The series of charts that follow below, of recent tops in both the Live and Feeder Cattle contracts, should be a refresher on what the Cattle Complex CAN do on the bearish side…which I’m pretty sure many cattlemen and traders have totally forgotten. And you can be assured that in EVERY top here, opinion was NOT even close to suspecting that big declines were dead ahead…It just NEVER works that way in this business…Everybody knows it…but everybody forgets it: The news, fundamentals and analyst’s “logic” are ALWAYS the most bullish at the top.
Sometimes bull markets just end…and go straight back down but it is more common to see bull markets make their highs and then hang around for months, making big swings back and forth, all the while soaking up more buyers in the futures markets AND the real world (at absurdly high prices), while also frustrating potential sellers…Eventually, the longs get complacent, and shorts more or less give up….And then the market does finally fall off a cliff…I’ve been there. You’ve been there…In the futures game, this story is as old as it ever gets…
Interestingly, when the sell off does begin, with all the bullish rhetoric that is still being trumpeted everywhere, the masses see no reason for alarm, and dips are only perceived as buying opportunities...LONG after the trend has turned down (and I remind you again that the highs in Cattle were made last October), buyers will still see the charts as bullish (along with the “fundamentals”), and as the market trades sideways their optimism only grows stronger as talking head perception becomes more and more that, “Cattle just won’t go down!”
BUT THEY EVENTUALLY DO…IN 100% OF THE BULL MARKETS I HAVE SEEN…AND IT IS SEEMINGLY ALWAYS WHEN NO ONE IS EXPECTING IT.
Enough of my own chatter…Here are some recent cattle market tops...Do be aware that, in every instance here, at that top tick, every single contract had a look of “onward and upward”, AND I can assure you, at that same moment, there was basically ZERO opinion to suggest a marked decline was about to take place…
Check them out… Then compare them to the present…I’ve broken the charts down into a Before & After format such that you can hopefully imagine/visualize what the masses were possibly expecting when the top tick was hit…and then what actually happened…And I reiterate, I have yet to see a top where everybody was BEARISH. It is ALWAYS the same. Opinion/”Logic” has generally been unanimously bullish prior to EVERY top I have ever seen.
And here are a few recent tops in Live Cattle…Same as in the Feeders, you can surely imagine they were all only accompanied by Bullish sentiments as the highs were being made…It IS how this stuff works…Greed, “bullish” fundamentals and letter perfect “logic” all supposedly provide a window to the future…but all they all really do is explain what ALREADY has happened.
And of course, recently there was this related situation in the Hog market…Last summer, the USDA’s Quarterly Hogs and Pigs report indicated supplies would be quite short in the coming year…which was supposedly extremely bullish for hog prices…and look what happened…They jumped immediately after the report, then sold off…then went SIDEWAYS (like Cattle?) and then got clobbered…
So that’s some history…What follows is what the cattle market looks like today…and I encourage you to compare today’s charts to all of those shown above…
Start with the long term look…I think to assume this is going to go higher…or even stay up here…denies all reason. Being short has not paid yet but I absolutely think it will…and when it does, it will be BIG.
All option costs in this newsletter include all fees and commissions.
One of the thoughts you need to take away here is that “being right” in the markets often means “being wrong” first….BEING WRONG IS PART OF THIS GAME…But to be right…and in a position to MAKE THE MONEY YOU ENVISION MAKING…sometimes requires a “stubborn” commitment/conviction that you WILL eventually be right…which is where the 1 & 1 can be an immensely invaluable tool…The numbers on these charts are real, and the reality IS that relatively small moves higher WILL put you in a position to recoup 100% of the what you have invested…and then be able to reinstate the position at even better price levels…And on the flip side, neither of the down moves I have drawn in for these two contracts is all unreasonable, and the resulting values for these options are not just wishful thinking. Obviously, if the market went dead sideways until expiration, it could mean losing 100% of what you have spent…but I would then just be recommending that you do the whole thing again. Keep the bet on. Stay short. Be in this for a big hit.
DO SOME OF THIS. I think October is a lifetime away right now. I think there is NO WAY Cattle are just going to hang here until then…and my sense is (and yes, it has been for a long while) that the beginning of the downswing is ANY DAY NOW or I wouldn’t be pushing as hard as I am…But, that being said, if they do go higher, so be it. I WILL just be short at better prices.
CALL ME and get on it..
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Cattle