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SIEGEL
TECHNICAL MARKET UPDATE
FOCUS ON THE HOG MARKET: The bears continue their reign in the hog market, as higher-than-expected marketings, poor export demand and robust product supplies continue to send cash prices heading south. To say the least, the fundamental situation in the pork industry remains sad. According to USDA estimates, pork supplies in 1998 are expected to increase by about 9 percent, which will lead to record total pork production of about 18.6 billion pounds–far exceeding the previous record of 17.8 billion in 1995. Overall, the total market herd has increased by 3.6 percent, with the large rise in market-ready hogs resulting from last summer's large increase in the pig crop. Indeed, according to the USDA September Hog and Pig report, it appears that pork producers have expanded the size of the breeding herd by 2.7 percent. This equates to 250,000 animals being added to the breeding herd as compared to inventories one year ago. The most robust growth has been in the western Corn Belt, where producers added 190,000 animals, with another 125,000 coming in from North Carolina, Arkansas, and Oklahoma. Even more bearish is the fact that the number of sows farrowed this past summer jumped 5 percent, with pigs per litter up 1.5 percent. The result was a 6.5% increase in the summer pig crop. Throughout the fall months, farrowing intentions are expected to rise by 6.5 percent and 7.6 percent this winter. The projected sharp jump in marketings should help propel U.S. pork supplies by about 4 percent in the last quarter of 1997 and 9 percent for 1998. Also, contributing to higher pork production throughout the fall and winter will be heavier marketing weights, which are expected to be about 1 percent larger over the next 12 months. Experts claim that this increase is related in part to a drop in feed costs, particularly from greater soybean meal supplies.
The projected cymbal increase in pork production from 17.1 billion pounds in 1997 to 18.6 billion in 1998 will be one of the largest in recent history. While this may provide a potential boost to corn and soymeal usage, and help to rally those respective markets, it's expected to have an equally depressing impact on hog prices. By next spring and summer, pork supplies could be 10 percent above the previous years level and prices much lower than current levels. It's hoped that these lower prices will ultimately stimulate increased demand from both domestic and foreign users. Here in the U.S., the beef industry continues to feel the lingering effects of Mad Cow disease and the summer E. Coli scares that could see more American families consuming “the other white meat.” The Japanese could also become aggressive buyers of U.S. pork throughout the fall and winter. Nevertheless, it appears that the large production potential and increasing supplies will continue to overhang this market. Unless future pig crop reports indicate an unlikely change among the nation's pork producers regarding expansion plans, the outlook for this market appears bleak. Many now feel that hog prices are destined to fall back toward $50/cwt., which was last seen in 1995. Further deterioration to the mid $40's by the spring and/or summer of 1998 is also a good possibility.
While the long- term scenario for the hog market appears to be bearish, violent short-term corrections are still highly probable. Momentum indicators such as the slow stochastic and RSI remain very oversold and are already showing divergence. Should the marketings begin to lighten up, or a jump in retail demand catches the packers by surprise, the rebound could be quick and vicious. Indeed, considering the number of short positions now held by commodity funds, there appears to be plenty of fuel to propel a substantial short covering rally.
Technically, the daily bar chart indicates Fibonacci retracement bands near 65.30, 66.50 and 67.75¢/lb. The 18-day moving average comes into play near 63.50¢/lb. Once the market confirms a solid pivot point, an advance to any of these chart levels is possible, However, at this point in time, we'd be happy to see a nominal jump back to 65¢/lb. According to Moore Research Center, seasonal factors will begin favoring hogs at the end of October with an upward bias continuing until mid-January. Of course, this tendency tends to fly in the face of the heavy supply fundamentals and poor demand now being projected. As usual, we'll let the technicals be our guide. Although our long-term bias remains a bearish one, at current price levels, we see a good short-term buying opportunity at hand and choose to act accordingly.
Recommendation–Aggressive–Look to buy December lean hogs near 60¢/lb. Sell Stop–60¢/lb., close only. Objective–Initially, 65¢/lb.
DECEMBER U.S. TREASURY BONDS: In the wake of the cautionary comments made last week by Fed Chairman, Alan Greenspan, credit traders continue to lay low. Relief that the CPI did not emulate the greater-than- expected increase in the September PPI was apparent, and appeared to cancel out the sharp rise in retail sales reported the previous day. Now that the market has seen all of the September economic data, it is faced with a dull stretch of time when it will get nothing but second-string data to react to. In light of this, we expect to see a choppy market, with prices oscillating between 116- 00 on the upside and possibly 114-00 on the downside. Longer term, we continue to foresee lower interest rates, with the long bond yield dropping to 6% in reaction to moderating U.S. economic growth. For the near term, we plan to use the aforementioned trading range to capitalize on the market's current lack of direction. Eventually, we expect to see prices exceed the current contract high and climb to our swing objective at 122- 00.
Recommendation–Look to buy near 114-00. Sell Stop–113-00, close only. Objective–Initially, 116- 00.
DECEMBER S&P 500 STOCK INDEX: Concern over a possible pre- emptive interest rate hike by the ever vigilant Federal Reserve, along with the usual profit taking in the wake of the latest round of quarterly earnings estimates, appears to have unnerved some of the weaker stock index bulls. Though little has happened to alter the dominant trend, the charts suggest some short-term vulnerability. The credit markets also appear a bit shaky at current levels, as last week's rise in European interest rates and negative comments made by Alan Greenspan have definitely taken a toll on trader sentiment. And similar to the T-bonds, we feel that, facing a sparse period of market-moving reports, the bulls will have little to lean upon. Accordingly, with some of the high tech issues looking to retreat and some well-recognized “gurus” getting cautious, the stage is set for a well- needed correction. Accordingly, a break back to 925 in the December S&P would serve to cheapen index values (and the stocks that comprise them) as well as accommodate those patiently waiting to buy a good break.
Recommendation–Look to sell near 965. Buy Stop–982, close only. Objective–925. Those wanting limited risk, should consider the purchase of put options.
DECEMBER HEATING OIL: An apparent easing of tensions in the Middle East allowed bearish supply fundamentals to reassert themselves this week and knock over 5¢/gal. off the recent rally. However, support developing at 58¢/gal. (also the Fibonacci 61.8% retracement band) brought out the bottom pickers who were quick to react to news that Iraq was threatening to sever its cooperation with UN weapons inspectors if additional sanctions were imposed. We expect that the presence of the Nimitz battle group in the Middle east will keep traders anxious about becoming too short, no matter the prevailing supply fundamentals. Should push turn to shove in that region, the reaction in the futures markets would be very predictable. Nevertheless, considering that API stocks are running 22.12 million barrels above last year's level and refiners are still utilizing 97.1% of there capacity, it will take an extremely cold winter in the Northeastern U.S. to have much of an impact upon this much of a surplus. Accordingly, it appears that further price gains in heating oil futures will remain contingent upon strength in the rest of the complex as well as further developments in the Middle East.
Recommendation–Look to sell near 60¢/gal. Buy Stop–62.50¢/gal., close only. Objective–55¢/gal.
October 16, 1997 Siegel Trading Company, Inc.
549 Randolph, Chicago, Illinois
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