It's time to tie the leg strap on you holster, there's going to be a gunfight. Margin clerks were shooting at everything that moves this morning. I have little reservation saying this as I've stated it under previous conditions as well.
At present, although there are fundamental factors that got the market here and are still in play, the current price action is about money and not cattle.
Most will think I am nuts now, but here goes with what's coming down the pike. Both yards and packers would like to see fat cattle. In order to achieve this, yards will have to hold back a percentage of the green cattle. This will make for further shortages on the front end and more product in the back end.
Next, the consumer is chewing on steaks priced against an under-$220 box price. In three weeks, they will be chewing on steaks priced against an over-$230 box price. The retailer will lose margin, raise the price, and slow or stop features. The consumer will see a small shell shock as featured ribeyes move from $8.99 to regular price of $11.99 or $12.99 with no features. This may help to counteract the immediate shortage holding cattle back would cause.
I do not perceive that packers would remain so aggressive if price movement was based on domestic demand. I perceive there are either further-out front sales, or an increase in exports that we may not see until data is derived from USDA. The aggressiveness of the packer is rare unless they have commitments to meet or margin to make. As margin is slipping, it leads me anticipate that commitments are the reason. The wave count has begun to unfold in a manner that is perceived more readable.
From an hourly standpoint, starting at the $108.67 on April 5, the June contract rallied to $117.57 and created an oscillator move from under the zero line to a high reading of 2.866. The price declined from the $117.57 high to the $114.42 low on April 24. This took the oscillator back below the zero line, confirming a wave 1 and 2. Currently the wave 3 has created a new high in price with a new high of the oscillator.
What is anticipated now will be a wave 4 that may last one to four days, and allowing enough time to push the oscillator to or below the zero line. Then, a wave 5 to new highs will be likely.
So, this market is not anticipated to have topped, and when or if the wave 4 is determinable, I'll make fifth-wave projections.
Feeder wave 3
The wave count in feeders is similar on the short term. Today's high is perceived the top of a minor wave 3, then one to four days of sideways to lower trading is anticipated. Enough time is needed to allow the oscillator to return to the zero line that will help decipher the wave 4.
It is very possible that traders keep feeder prices within today's range for the next couple of days. This marking of time would allow the oscillator to weaken to or fall below the zero line. We're dealing with excessive price range now: Be overly cautious on everything you do.
Were you to have executed my recommendations of the synthetic short futures, you must hold those to expiration to benefit from the strategy. Although option premiums have swollen greatly, they remain intrinsically only the spread between strike and underlying futures contract. Hence, if you decide you want out now, you will be losing significant dollars that you may or may not have to.
Remember that with the negative basis, you are attempting to capture it. If cash were to come to futures, the value of your inventory will increase to wherever the futures and index meet, plus or minus your local basis. Were futures to go to cash, your inventory will remain at the same value and you will benefit from the difference between your put strike and the underlying futures.
Your worst case scenario is that cash soars to futures, closes the basis, and continues to move higher creating an environment from which you just can't make any more money off the cattle as at an even basis, your inventory increases in value at the same or similar rate as does the futures contract.
So, I've fielded many calls about wanting out or thinking this market may go higher. I urge you to rethink your strategy if this is the case. The market may go higher and you may have to meet unlimited margin calls. However, the strategy is perceived sound, and a way to secure what has been gained.
If forward contracting is available to you, allow someone else the pleasure of assuming your risk.
An investment in futures contracts is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of loss in excess of their margin deposits. You should carefully consider whether futures trading is appropriate for you in light of your investment experience, trading objectives, financial resources and other relevant circumstances. Past performance is not necessarily indicative of future results.