Tuesday, April 28, 2009

HOGS Gets Slaughtered

I am far from being an expert on swine flu, but based on everything I have heard, there is no evidence to support that swine flu can be transmitted through the consumption of pork products. Still, investors did not let this fact stand in the way of selling Zhongpin (HOGS), the $231 million (market cap) Chinese producer of pork and pork products. HOGS fell 6.2% yesterday on the second highest volume session since last July in what was clearly a case of guilt by association.

Options traders, however, reacted in a different fashion. The graphic below, courtesy of WhatsTrading.com, shows that while options activity spiked dramatically, most of the action was in calls, which was running at about twice the rate of put volume yesterday. Also, implied volatility (not shown) more than doubled.

Obviously there is a great deal of uncertainty surrounding swine flu – and a fair amount of misinformation being circulated. There is no doubt that eating pork products is unrelated to the spread of swine flu, but that does not necessarily mean that pork products and stocks such as Zhongpin will be shunned and suffer real declines.

[source: WhatsTrading.com]

Disclosure: Long HOGS at time of writing.


Anonymous said...

I noticed that in your IYR chart you used the 4 and 40 monthly moving averages. any specific reason? what averages do you watch for etfs, indexes and single stocks(or commodities)?


Bill Luby said...

For the most part, the charts that I post for public consumption use the following simple moving averages:
- Daily 10/50/200
- Weekly 13/39/100
- Monthly 4/13/40

At one point I did a fair amount of back testing on SMAs and EMAs and finally decided that it was as much personal preference as hard science. The monthly values are very close the weekly values, which line up approximately as 1 quarter, 3 quarters and 8 quarters.

When I post charts here, I sometimes drop some of the indicators so as to simplify and unclutter the charts.

For some of my more analytical work, I have partially standardized on 16/38/155 days, but once again, this is largely personal preference.

As a rule, I generally do not use moving averages to help generate entry signals, but I sometimes use them to assist with exit points.

I hope this helps.



Eric said...

I am looking at airlines. Depends how bad this flu really is. But could be an awesome buying opportunity for airline stocks.
Big double bottom put in from July and March, not sure they will go anywhere near those lows, but this could be a catalyst to get them close.
Watching UAUA, LCC, DAL

And I am close to bailing on my Puts, this market is resilient as hell. I am betting we end the week lower though.

keithpiccirillo said...

Similar trading logic would occur if there were to be a nuclear incident at a power plant.
All associated sector holdings would sell off, even if they were on the other side of the world.
Thanks for pointing out an opportunity.

Anonymous said...

"As a rule, I generally do not use moving averages to help generate entry signals, but I sometimes use them to assist with exit points."

thanks for your answer. I think the moving averages are good for exits too. everyone should have some kind of point where they say I guess I was wrong about an index or stock. I think moving averages can help.

I am intrigued by this moving average indicator for the sp500


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