Bears Hosting a Pig Roast
Fundamentals
After an impressive 800-point rally in nearby Lean Hog futures during the past month, it appears that bearish traders have crashed the bulls' party, as strong speculative selling has hit the market. Traders had bid-up Hog prices lately, as strong packer profit margins and relatively tight supplies of market-ready Hogs gave support to the market. However, there have been some concerns that futures prices may have gotten a bit ahead of themselves, especially in the August contract, which has been trading at a stiff premium to the CME 2-Day Lean Hog Index. Lower pork cut-out prices on Monday made traders nervous that packers would begin to balk at current cash Hog prices, which if true, would put pressure on the nearby Hog futures -- especially given the hefty premium. This came to reality, as a bout of commodity fund selling hit the market on Tuesday and prices fell below near-term chart support levels. The August and October contracts were the hardest hit, as this is where the largest speculative presence has been. Large speculators have been adding to existing net-short positions, according to the most recent Commitment of Traders report, which shows large non-commercial traders added an additional 7,984 net-short contracts as of the week ending July 14th. Although it appears that the recent rally may be over, bulls still may have the final say -- especially if the pork export market begins to recover as the summer progresses, which would increase demand for Hogs at a time when Hog weights tend to decline due to hot weather.
Trading Ideas
Given the still hefty premium the August contract is trading at vs. cash Hog prices, some traders may possibly wish to investigate bear spreads in Lean Hog futures. An example of this trade would be selling August Hogs and buying December Hogs. As of this writing, August Hogs are trading at a 560 point premium to the December contract, and traders holding this bear spread would want to see the spread narrow. Traders should remember that spread trading may not be less risky than holding an outright position, and it is possible for one contract month to be trading higher and the other lower at the same time.
Technicals
Looking at the daily chart for August Hogs, we notice the market trying to recover from Tuesday's steep sell-off. Prices are still holding above the 20-day moving average, and in fact, this short-term indicator provided a buying point for short-term traders during yesterday's declines. Volume has been dropping off the past several session, as the market was making its multi-week highs, which could be a sign that the rally was more about short-covering than the establishment of new positions. The 14-day RSI has turned neutral, with a current reading of 50.84. Support for August Hogs is seen near the 60.75 area, with resistance found at last week's highs of 65.55.
Mike Zarembski, Senior Commodity Analyst
