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The Great Market Rally, Or Was It?

Everyone seems to be buzzing about the improbable market rally in the latter half of May and first part of June. There's an incredulous air that the market actually moved higher in the face of what were largely bearish fundamentals.

I'm not one to criticize market analysts -- I made my living plying that trade at one point, and I appreciate that such folks are always remembered when they're wrong, and easily forgotten when they're right.

However, I recently read an article by an analyst who has carved out a niche, not by discussing the future but explaining what's already transpired (a great job if you can get it). After reading his article, I couldn't help but think this was one time when the analysts really missed the boat.

The trade this week is likely to be steady at best, and the next 60 days are going to be a struggle. We're likely to not only retest the lows set in early May, but set new lows in the mid $70 range (mid $70 or mid $80 is a favorite tactic of market analysts because it gives them a $6 range to work with).

The point is the fundamentals weren't wrong. What was wrong was how quickly we took the market to those lows and how long it took us to regain market equilibrium. If we'd traded cattle at the mid $70s level last week, as many predicted in early May, where would we have traded cattle in mid July?

The market hasn't had a surprising rally; the market overreacted on the downside, regained a semblance of equilibrium, and is likely to erode from these levels as market fundamentals dictate. It's a classic example of fear and greed, and their role in the short-term functioning of the marketplace.

The balance of power in the marketplace is a fragile thing. For a variety of reasons, it tipped in the packer's favor, giving him tremendous margins, just the opposite of what was occurring in early January. In both cases, the story shouldn't be the correction but rather how the overreaction came about.

Market analysts, risk managers and the like have developed an amazing array of tools to allow them to predict the fundamentals with a fairly high degree of accuracy. Much of the risk in the marketplace isn't from fundamentals but deviations from the fundamentals that continue to occur in both directions on an increasingly frequent basis.

The large feeding complexes are largely insulated from this effect as they're in the market week after week. Thus, on the average, everything works out for them.

It's the small feeder, the retained-ownership operator, or the investor -- those who have a disproportionate portion of their marketings concentrated in relatively small windows -- who bear considerable risk as a result.
-- Troy Marshall