Why You Should Short Hog Futures

NEW YORK (TheStreet) -- Unless you are trading livestock, you probably haven't heard of the PED virus (Porcine Epidemic Diarrhea).

In the farming world, however, this disease has caused mass panic in the hog supply chain. As a result, the Globex Lean Hog April 2014 futures have shot up from $90 in mid-January to over $126 as I write this report.

Here is a look at the recent Lean Hog Index price chart, which mirrors the futures contracts:



Today at 2 p.m., the U.S. Department of Agriculture is set to release the quarterly Hogs and Pigs Report, a highly anticipated market-moving event.

The last time I shorted a commodity was cotton near $2.25 a pound in early 2011. That was shortly followed by an epic crash, making contrarian traders rich in the process. Unlike cotton prices which were driven by unrealized Chinese demand for the commodity, hog prices are being driven by supply concerns because of the PED virus.

Similar to the cotton run, the rally in hog prices has been characterized by daily "limit up" moves. That has trapped a lot of shorts as they aren't able to exit the trade, because the market never really opens day after day.

Shorts naturally panic when they cannot cover. Therefore, short-selling a commodity can be devastating, and this fuels the rally. Famous trader Jesse Livermore once lost 90% of his fortune on a blown cotton short.

The public has extremely bullish expectations from today's hog report. Anything less than monumental PED virus death levels will lead to disappointment. That is where I see the opportunity for a short trade.

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