Lean Hogs and the Rubber Band Disposition

• The most recent CFTC Commitments of Traders report (legacy, futures only) showed noncommercial traders holding a record large net-short futures position. 
• At the end of May, the CME Lean Hog Cash Index had completed a bullish reversal on its long-term monthly chart. 
• Based on Newsom's Market Rule #6, the lean hog market should see this resolution resolved with a move by noncommercial traders to get back in line with the commercial side. 

A number of markets made big moves Tuesday, but lean hogs ruled them all. Here we saw the July contract close $4.175 (4.9%) higher while gaining $1.30 on August which gained $1.35 on October. This tells us there was solid commercial buying to go along with noncommercial short-covering on the last day of the positioning week for the latter group. Recall last Friday’s CFTC Commitments of Traders report (legacy, futures only) showed noncommercial interests holding a net short futures position of 36,114 contracts as of Tuesday, May 31, the largest net-short futures position on record. This was a substantial development, as any market is when the noncommercial side moves to an extreme. I’m reminded of what I talked about in my most recent piece on the S&P 500 that included discussion of a Wall Street Journal article on global investors holding the most bearish bets on US stocks in over a decade. 

At the same time, the CME Lean Hog Cash Index (HEY00) was posting a new 4-month high on its long-term monthly chart. When it comes to reversal patterns, as I listed in a piece from last week on Barchart’s National Cash Price Indexes for grains, new 4-month highs and lows are one of the more reliable reversal patterns that I look for. This indicated to me the long-term trend of the Index had turned up after being down since a bearish key reversal during August 2022. For the record, the key reversal is the second most reliable pattern I keep an eye out for. 

With the Cash Index moving to a long-term uptrend while noncommercial traders hold a record net-short futures positions, the stage was set for what promised to be an explosive conclusion to a classic Rubber Band Disposition. What’s a “Rubber Band Disposition” you ask? This describes the situation when commercial (those traders actually involved with the underlying cash commodity) and noncommercial (investment traders, funds, algos, etc.) activities are going in opposite directions. The market is like a rubber band being stretched, eventually breaking, and snapping back to its base. Newsom’s Market Rule #6 tells us “Fundamentals win in the end”, so the logical conclusion is for noncommercial traders to get back in line with commercial traders. In the case of lean hogs, that means an increased likelihood of a noncommercial short-covering rally. A quick look at July lean hogs (HEN23) daily chart shows the contract has rallied $5.00 from last Tuesday’s close through this Tuesday’s settlement, indicating noncommercial traders have are already actively covering short futures positions. 

How far might this move go? Again, the monthly chart for the Cash Index shows Fibonacci retracement targets to be near $90.69 (38.2%), $96.72 (50%), and $102.74 (61.8%). Given both the August-October and October-December futures spreads are running near neutral compared to the last five years, the most likely target becomes the 50% retracement level ($96.72) for the Cash Index. As of this writing basis is weak, with the Cash Index roughly $7.00 under June futures (and about the same for July). Let’s say basis strengthens through the summer and fall, this would still project a rally of more than $10 by the October (HEV23) futures contract (priced at $77.85 Tuesday afternoon). 

• Hog Futures Rallying for Turnaround Tuesday
• Cattle Rallying to New ATH
• Summer Hogs Pause Last Week’s Rally
• June Cattle Enter Deliveries