Are Large Speculators on the Atkins Diet?
Fundamentals
Speculators have been busy "beefing -up" their long positions in Live Cattle futures lately, as traders are ignoring current low cash prices for beef and turning their focus to potentially tighter supplies in the next few months. It will not take long to see what the government pegs U.S. Cattle supplies when the USDA releases its monthly Cattle of Feed (COF) report this Friday afternoon. Early estimates have both Cattle placements and on-feed supplies at their lowest levels since the late 1990's. Those holding long Cattle futures will need to see a "bullish" COF report, given the relatively large premium nearby futures are trading to the cash market. Even with the relatively large jump in Cash cattle prices on Friday, up $2.00 to $84.00, August futures are still trading at an over $2.00 premium to cash, which could spur some long liquidation selling should the COF report disappoint the "bulls". The most recent Commitment of Traders report released on Friday shows large non-commercial traders (hedge and commodity funds) adding an additional 13,425 net long positions during the week ending July 14th. Small speculators and commercial traders remain net-short Live Cattle futures, but they are beginning to lighten-up on their positions, given the multi-month highs Cattle futures have made. Cattle slaughter figures last week totaled 627,000 head, down nearly 10% from last year. With meat packer margins weak to negative, it may be difficult for cash cattle to catch up with futures prices, unless product demand begins to increase or Cattle supplies tighten considerably. We should have a better perspective on the supply situation after this Friday's report.
Trading Ideas
With Friday's Cattle on Feed report on the horizon and the mixed outlook for Futures and Cash Cattle prices, traders may pump-up the prices of Cattle options heading into Friday's report, as those with existing positions look for some "insurance" in the form of long Cattle option positions to help protect against a "surprise" in the COF report. However, with good support seen at the $82.00 area in the August contract and a 90 handle expected to draw additional hedge selling, some traders may wish to take advantage of any pre-report spike in volatility that may occur by looking into a short strangle position. A short strangle is comprised of a short call and a short put position at different strike prices in the same contract month. Trades holding these positions expect futures prices to remain within the boundaries of the strike prices, and time decay helps the position. An example of this position would be selling the August 90 call and selling the August 82 put. As of this writing, with August Cattle trading at 86.25, the strangle could be sold for about 0.40 points, or $160 per strangle before commissions. Given the risk associated with any short option position, traders will need to monitor the position carefully and may possibly wish to close out the position should the August futures move to the strike price of either the put or the call before expiration in August.
Technicals
Looking at the daily chart for August Live Cattle, we notice the latest leg in the uptrend formed by the June lows has accelerated once the 20-day moving average crossed above the 100-day moving average. This bullish signal was followed by a surge in speculative buying, especially by large speculative accounts that are more "technical" in their trading methods. However, we also notice a potential 'bearish divergence" forming in the 14-day RSI, when it failed to make a new high reading on Monday's multi-month highs of 86.625. The next resistance point for August Live Cattle is seen at 87.00, with support found at the July 10th lows of 82.95.
Mike Zarembski, Senior Commodity Analyst
