Will Commodity Funds Turn Vegetarian Soon?
Fundamentals
There is a lot of beef on the buy side of speculators' trading cards lately, as commodity funds have moved to a record net-long position in Live Cattle futures. Many of the "bullish" views in Cattle prices comes from the over $10 per hundredweight rally seen in the December futures since mid-June, which sent prices over psychological resistance at 100.00 during the past several weeks. However, recent fundamentals may cause these funds to cut-back on the protein. The most recent Cattle on Feed (CoF) report showed that high prices being received for Cattle caused an increase in placements on feedlots last month, which is up over 7%, month-to-month, which should likely lead to an increase in the supply of market-ready cattle later this year. However, the run-up in cash Cattle prices has hurt processor margins, with many packers operating at loss. A look at the most recent Commitment of Traders report shows large non-commercial traders holding a net-long position of a whopping 144,200 contracts as of September 14th. This record long position was calculated prior to this past Friday's CoF report and the resulting sell-off on the rather bearish placements figure. It will be interesting to see the extent of long liquidation selling that may have occurred after the bearish report and whether the funds' long position is still near record levels. This huge long position could leave the market vulnerable to a steep price correction should the market fail to take-out last week's high of 102.650 in the very near future.
Trading Ideas
Traders looking for a price correction in December Cattle, or even those who are long Cattle futures but who wish to hedge against any price correction -- especially given the huge long position being heal by speculators -- may wish to investigate the purchase of a put in Cattle futures options. An example of such a trade would be buying the December Live Cattle 98 puts. With the December futures trading at 100.950 as of this writing, the 98 puts could be purchased for about 1.60 points, or $640 per option, not including commissions. The premium paid would be the maximum potential loss on the purchase, with the option profitable at expiration in December should the December futures be trading below 96.400.
Technicals
Looking at the daily chart for December Live Cattle, we notice a potential reversal on last Thursday's failure after reaching new contract highs. We also have a bearish divergence forming in the 14-day RSI, which may lead further credence that at least a near-term top may be in place. Prices are now hovering near the 20-day moving average, with a strong close below this short-term indicator potentially triggering a "sell" signal for short-term momentum trading systems. The 98.700 area looks to be strong near-term support in December Cattle, with the contract high of 102.650 acting as resistance.
Mike Zarembski, Senior Commodity Analyst
