Feeder Cattle Prices to Weaken

Andy Waldock  |

The cattle market finally made a meaningful and perhaps lasting, high late last year. The market has pulled back to bottom and base approximately 20% off last year's highs. March's rally in the cattle market was easy to forecast based on the dominance of commercial trader buying as the market pulled back in January and February. You can see the February and March Commitment of Traders (COT) buy signals on the included chart. Now that we're up to speed, it appears that this rally is losing its fundamental support ahead of some seasonal weakness.

We use the net commercial trader position as a proxy for fundamental data. Logically, the commercial traders have access to better information and pricing models than we individual traders of multiple markets can ever hope to obtain. The consensus of their models and information are reflected in their net position as reported to the Commodity Futures Trading Commission (CFTC) for the weekly COT reports.

Moving to the COT chart we've built, you can clearly see that the commercial traders anticipate the next move rather well. To that end, they've been net sellers in each of the last four weeks. This has been enough to shift their momentum to the negative side and put us on the lookout for short selling opportunities. Also consider that their selling has increased as this rally has approached the trend line coming down from the all-time high. Finally, the commercial traders position size has grown as open interest has declined over the last few weeks thus, consolidating their control over the market's future behavior.

Commercial trader selling stalls feeder cattle rally at trend.Last week's strong close followed by Monday's weakness was enough to trigger our short-term momentum indicator trigger and bring about a short sale on this weakening rally.

The timing of this trade is classic commercial behavior as their selling precedes a 3-4 week period of weakness in the August Feeder Cattle contract. We've highlighted Moore Research's seasonal chart below to illustrate our current position. One more tip in reading their chart, notice the red line is the pattern for the most recent 5-year period. It also shows that this period of weakness is growing in magnitude.

August Feeder Cattle seasonality provided by Moore Research. (Emphasis ours)

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