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Futures Market Commentary for September 26th 2012 $HE_Foptions Xpress - Wednesday, September 26th, 2012

Preserve your cash in a volatile market.

Today's Spotlight Market

The current downsizing of the U.S. hog herd due to huge losses by producers is keeping market-ready hog supplies ample for now. However, expectations of a smaller herd size in 2013 is setting the stage for a potentially sizable recovery in pork prices, as supplies are estimated to be the lowest per-capita since the mid 1970's.

Fundamentals

Lean Hog futures have started to recover from the steep sell-off during the past 3 months, as it appears that herd liquidation has run its course and cash market pork values have bottomed. Many hog producers had a rough summer due to the severe drought in the central portions of the U.S. which drove-up feed costs and made raising Hogs an unprofitable endeavor for most producers. Herd liquidation flooded the market with Hogs, forcing futures prices down by nearly 30% at its worst levels since mid-July. Recently, we have seen wholesale pork prices rebound, as the flow of Hogs to slaughter has stabilized and supplies of market ready Hogs have now begun to tighten. Front-month October futures have now rallied over $5 per hundredweight from recent lows and have moved solidly above the 20-day moving average triggering "bullish" signals for short-term momentum traders. However, we must remember that lead month futures are trading at a $6-plus premium to the CME 2-day Lean Hog index, and unless we see a continued increase in cash market prices, October futures may struggle to move higher, as futures prices will converge with the cash index at expiration of the October futures less than 3 weeks away.

Technical Notes

Looking at the daily chart for October Lean Hogs, we notice how swiftly prices have recovered from the low of 70.375 recorded on September 7th. Since that time, prices have closed higher 9 out of 11 days, as short-covering buying by many small speculators took control of the market. We have started to see some long liquidation selling by large speculators occurring, as the most recent Commitment of Traders report shows large non-commercial traders shedding just over 5,000 contracts for the week ending September 18th. Trading volume has started to wane recently, which may be a sign that the rally is not drawing in many new longs to the market. The 14-day RSI is strong, with a current reading of 59.13. The August 14th high of 77.775 looks to be the next major resistance level for October Lean Hogs, with support found at the 20-day moving average, currently near the 73.735 level.


Mike Zarembski, Senior Commodity Analyst

Support / Resistance & Oscillators
  S2 S1 Pivot R1 R2
Oct Lean Hogs Pivot 75.425 75.850 76.400 76.825 77.375
Oct Lean Hogs Chart   73.735   77.775  

Today's Highlights and Economic Data
Economic Report 10:00 AM ET: New Home Sales
10:30 AM ET: EIA Energy Stocks
FND / LTD LTD: Sep Metals & Natural Gas
LTO: Sep Natural Gas


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