Don’t Follow the “Fundamental” Herd… You Might Get Slaughtered!
In 2020, all mainstream signs pointed to a Covid-led “Cowvid” crisis in livestock futures. Instead, feeder cattle prices broke free and haven’t “come home” since
by Nico Isaac
Updated: July 25, 2022
Along the vast trajectory of human history, there have been pivotal turning points when a collective belief held as truth is proven irrevocably false. For example: When the great explorer Magellan popularized the radical notion that Earth is indeed spherical and not flat in the 16th century -- OR -- when a Greek immigrant to Canada shook the culinary world to its core by showing that pineapple is indeed delicious as a pizza topping in the 1960s!
But what about the mainstream financial theory known as "fundamental market analysis." The thrust of this widely held belief is as follows:
Financial market prices are driven by external events, or "fundamentals," which can include crop-destroying weather patterns, political unrest, earnings reports, crop data, supply and demand numbers and so on.
This theory is as old as dirt and as commonly accepted!
Yet, we have a birds-eye view into a very different way of interpreting market behavior. The "Bible" on all things Elliott is Frost and Prechter's classic Elliott Wave Principle -- Key to Market Behavior (EWP, for short), which provides this ground-breaking counterclaim:
"Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life.
"The path of prices is not a product of news."
What "law of its own" does the market follow? EWP continues:
"The market's progression unfolds in waves. Waves are patterns of directional movement. Each pattern has identifiable requirements as well as tendencies. The Wave Principle is the only method of analysis that also provides rules and guidelines for forecasting."
To understand Elliott wave analysis at work, let's review the recent history in feeder cattle, starting in early 2020. At the time, the US livestock market was slated to be a foregone casualty of the global pandemic. In fact, an entirely new word was created to describe the widely expected decline of farm-raised beef prices; i.e. the "Cowvid" Crisis.
The widespread closure of restaurants, shutdown of school lunch programs, dent in demand for meat as a luxury food product, and shuddering of meat processing plants amidst Covid outbreaks all spelled D-O-O-M for cattle markets, as laid out by these news items from then:
- "Live Cattle Futures Plunge as Pandemic Roils Markets" (April 6, 2020 Reuters)
- "US Cattle Futures Hit 10-Year Lows as Coronavirus Stokes Demand Uncertainty" (March 17, 2020 Farming Independent)
- "Coronavirus Sends Crop and Livestock Prices into a Tailspin" (April 7, 2020 FB.org)
Said one March 31 Industry report:
"In times of uncertainty, people spend less and save more due to perceived risk. With jobless soaring, Americans are experiencing unprecedented loss of income.
"The numbers are sobering to look at...This is the kind of thing that will contribute to negative impacts on the industry."
"In downturns, consumers tend to seek products at the lower end of the price scale. Beef, however, doesn't have extensive low-cost product offerings."
Added another March 2020 AgWeek column:
"Even the [mad cow disease] case in December of 2003 did not result in as violent a reaction or selloff in the cattle market as this black swan event. We really have nothing to compare it to."
An "incomparable" event is an apt description for the pandemic.
But there was another kind of analysis by which to compare feeder cattle's trend; namely, Elliott wave analysis. And by that measure, the future of this livestock was not set to be a violent selloff. More like, the exact opposite.
In the April 2020 Monthly Commodity Junctures "Monthly Feature" spotlight, editor Jeffrey Kennedy showed this weekly price chart of feeder cattle which identified a completed, multi-year decline since 2017 as wave a.
From Jeffrey's analysis:
"The minimum expectations of a completed five-wave decline have been met. This argues that we do indeed have a tradable low in place. If that's the case, then we have seen a very significant low in the feeder cattle market, one that should last a number of years.
And, this next chart captures the powerful, two-years and running rally that feeder cattle has undergone since:
We completely understand if you're not sold yet on the pineapple-pizza-topping idea yet. You'll get there when you're ready!
But when it comes to knowing the future of commodity prices, the time to open yourself up to a new way of analyzing price trends is here. Even the most violent, black swan events like that of the pandemic can't accurately determine where prices will go.
So, consider this alternative: The only confident measure of a market's trend is investor psychology, which unfolds as Elliott wave patterns directly on price charts.
Right now, our Commodity Junctures Service presents high-confident outlooks for the world's leading names in livestock, grains, softs, foods, and more.
See below to turn a new page in your investment future.
From Feeder Cattle to Cotton: Once Upon an Opportunity
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