Call the Market

Oh, what a time to be alive! If someone wanted to be an adrenaline junkie without partaking in any physical danger like skydiving or swimming in the ocean with sharks -- they should just take a liking to the cattle complex because it's been a gut-wrenching ride over the last five-trading days.

On Thursday, Aug. 7, both the live cattle and feeder cattle contracts scored new contract highs after trading higher throughout the entire earlier part of the week as beef demand was strong and stable and traders appeared to be fully on board with giving credence and merit to the market's favorable fundamentals. But lo and behold on Friday, Aug. 8, traders had a change of heart as all feeder cattle contracts closed limit lower (down $9.25), and the live cattle contracts closed anywhere from $4 to $5 lower.

That obviously led to the panicked question: Has the cattle complex made its top for this rally?

And while the trade developments last week suggest the market still possesses plenty of gusto and steam, there are a couple of lessons we need to learn from the volatile trade that's recently played out before our eyes.

Number one: The market can do whatever it pleases. Sure, there may be loose restrictions, like daily trading limits, but by and large, this beast roams as it pleases. Whenever sorting through the market's changing dynamics becomes overwhelming, I'm quick to jot my thoughts down plainly on a piece of paper. I draw a line smack down the middle of the page with one side of the paper being the bullish factors, and the other side being the bearish factors. Typically, this helps me settle the bouncing thoughts in my mind and gain a clearer perspective of where the market sits. But even if there are 10 bullish fundamental factors stacked up against one bearish factor -- like Aug. 8's market showed -- the market can change on a dime.

Following the record-high close on Aug. 7, traders elected to partake in some profit-taking, which is largely why the futures complex traded lower Aug. 8. It wasn't because someone found a hidden feedlot where a million head of cattle were unexpectedly ready to go on the showlist; or because beef demand deteriorated overnight -- actually it got much stronger; or because Mexican cattle imports were allowed to resume again.

You see, we like to think the futures complex works simultaneously alongside the market's fundamentals and represents whatever that state may be, but that isn't always the case. Sure, at the end of the month, the contracts have to converge. But not every day is a perfect representation of the market's true fundamental state.

Second: The market's string of events -- closing at a record high on Aug. 7, at or near limit lower on Aug. 8, and then higher again on Aug. 11 and 12 -- highlights the importance of breathing through the market's uncertainty. If everyone had panicked on Aug. 8 and carried that anxiousness into the complex on Aug. 11, the downside potential could have been significant. But thankfully, the market has tamed traders' and cattlemen's anxiousness by posting a wild rally in the boxed beef complex, which has again helped refocus everyone's attention on the strong state of the market's fundamental position.

Nevertheless, we have recently been reminded of the wild tips and turns the market can make. And given the sheer price point the contracts are currently trading at, more volatility naturally exists. But even so, nothing good comes from anxiousness and knee-jerk decisions. Wait and see what developments surface. Rarely is it a good idea to change your long-term marketing strategy because of one unforeseen hiccup.

ShayLe Stewart can be reached at ShayLe.Stewart@dtn.com

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