There’s an underlying premise of investing in the stock market – time is your friend. While there’s bound to be some noise and price instability along the way, the overall trend is usually favorable. So, over the long run, investment in high-quality, well-managed companies largely results in a favorable payoff if you’re patient with the market.   

Unfortunately, futures markets don’t work that way. Whatever your position, it’s defined against a specific time expiration. As such, the luxury of simply waiting out the market – whether you’re long or short – doesn’t exist on the futures side. The time stipulation can be especially nerve-wracking when the market sentiment is overwhelming and in opposition to your position. 

February turns bearish

That brings us to the bigger story around February. For a time it seemed the market couldn’t get out of its own way – the first time that’s occurred in several years. All of a sudden, the trade assumed worries about a variety of factors around the consumer and beef’s pricing power.

That wasn’t totally surprising; after all, the cattle market headed into February being nervous anyway. As noted last month, “…there needs to be some caution regarding beef’s pricing power in the current economic environment… Only time will tell if that occurs in a significant way. If so, it will be translated fairly readily into the wholesale market and could provide a major challenge for this spring’s fed market.”

However, the extent of the plunge was especially sharp. The February live cattle futures contract traded near $129 in late-January (sharply off from the $134+ trade in early January). And, in a little over two weeks, the contract plunged another $5 to $124.
 

Cattle Market Weekly: Demand Whacks Cattle Prices
 

The sell-off was largely spurred by the torrent of negative sentiment about beef’s competiveness. Bearish concerns kicked in with increased focus on the influence of new payroll tax rates and higher gas prices on consumer spending. And indeed, the angst was supported by stubbornly stagnant wholesale prices through most of February. February’s cutout action was especially disappointing during the first three weeks of the month chopping along at about $183 – a level that tests well-established support (Figure 1).

weekly beef choice cutout value

All that bearishness started in motion a continual decline with sell stops being triggered on the way down; the slide ends up just feeding on itself. If you were holding a speculative position, being long the futures market, that action was especially painful. Do you jump out before it gets even worse, or stand firm because the market is too far stretched to the downside? That’s a difficult call when you know the clock is ticking in the background; there may not be sufficient time for recovery.