April 9, 2020
ARE CATTLE PRICES MOOOOVING BACK TO PRICE EQUILIBRIUM
Can Cattle get back to price equilibrium defined as where supply and demand is roughly equal? There are some interesting fundamental factors and technical factors that beg to be examined. After taking a close look at these factors it is my opinion June Cattle might provide some very exciting trading opportunities.
What do we know about Cattle?
We know that Cattle prices have been hammered as commercial dining establishments have moved to carry out only, and as millions of people have gone lock down in their homes. There are two other fundamental factors that jump out at me. The first is the very large spread between what buyers are paying for Cattle and the nearby futures price. As of Wednesday the price paid for live Cattle was over $16.00 higher than the April futures, and the more than $20 higher than the June Futures, frankly that is a large futures discount to cash. It begs the question how really efficient are the futures markets at this time. Secondly are the numbers of processing (packing) plants that are being shuttered due the employees suffering from Covid-19.
Moooooving to technical analysis when I examine my model we know that Cattle are in a significant downtrend. It tells us that it will take a Friday close at or above $116.67 to reverse the trend to bullish. It also tells us that unless we get some market mood changing dynamic news we will likely be in a down trend for another five weeks at least. But does that mean we will be lower during that entire time? Could it be that we could actually have a greater number of higher closes than lower?
Well my model suggests that actually might be the case. As of last Friday’s close (all my work is based on Friday closes) the Negative Indicator was five Standard Deviations above the long term average, which triggered Positive Equivalency. It is interesting to note that June Cattle have been in this condition or on the verge of Positive Equivalency for the last four weeks. So what does this tell us? When the Negative Indicator triggers Positive Equivalency it is a strong signal to look for levels to counter trend buy. Is it always correct? Nope, but I have learned not to ignore it either. A strategy one might consider is to look for levels to get long and use logic based stop loss orders. So where might one want to look at getting long? I enlisted the help of my partners Tom Fritz and Steve Erdman both Inside Futures Contributors to help answer that question. Tom Fritz suggests based on your risk taking ability to buy June Cattle at $82.75, or $80.60 give or take. Steve Erdman suggests either buying June Cattle at $85.27 with a $82.40 stop, or selling June 84 puts at the market (as of this writing around $5.25) and risk them to $7.75. I will look to buy June Cattle around $83.00 and will add to the position if it continues lower, after that the second purchase I will re-evaluate.
For the purpose of discussion assuming I am correct and the condition of Positive Equivalency propels June Cattle higher will it change the long term trend? That answer is based totally on timing. If the Negative Indicator gets back closer to being balanced within the next two or three weeks it is my opinion that at that time June Cattle should be sold. Why? Because it will take a thirty dollar rally from current levels to even have chance at a trend change. While such a rally is possible in my opinion it is not likely, however, if the Negative Indicator takes five to six weeks to re-balance there is a greater chance for a trend change.
So to summarize in the very near term I am suggesting one look at be counter trend long. If correct once the June Cattle are re-balanced I will most likely look for levels to be long term short once again.
My name is Lee Gaus and if you would like to see more of our thoughts go to our website ifgfutures.com. There you will also find articles written by my partners Tom Fritz, Steve Erdman. If you have any questions you can reach me at 1-877-304-1369, 312-384-1166, or email me atlee@efggrp.com. If there is a commodity you would like me to address shoot me an email.
There is significant risk involved in trading futures and/or options on futures. Futures and/or options of futures trading may not be suitable for all investors. Investors should consider these risks and evaluate their suitability based on their financial conditions. Past performance is not indicative of future results.