It was a positive week for the cash markets and box beef cutouts with reports of +135 trading out west and an 18+dollar move in the cash cutout from last week’s lows to this week’s highs. You would think that would have pulled feeders or fat cattle markets higher, right? Unfortunately, futures were obsessed over short covering in the grain markets and a falling crush to get off the mat and follow the cash higher. April live cattle going into delivery is trading at 131.50 while June trades 10+ less near 121 and the rest of the 2016 curve toils near 117-118. Fundamentally, a strong cash market and inverted futures curve screams BUY, but with rising inputs (grain) the funds are slow to add length. We get cattle on feed and livestock slaughter number at the end of the upcoming trading week, maybe that will give us enough bullish data to get the futures moving north again. If cash stays at current values, it’s hard to argue against a push in front month futures as May Feeders and June fats go to the top step as front month contracts. The CME Feeder Cattle Index for 4/14 was 44 cents lower to $156.57.
Fundamental commentary contributed by John Payne (firstname.lastname@example.org)
Live Cattle appear to have seasonally topped out in the near term. Most of the calls for 145 have gone silent. I still feel that the market will challenge the March highs before the spring beef market has concluded. The market has now alleviated the oversold condition, hopefully concluding the selloff. I still view this as a correction to a minor bull market, encapsulated within a major bear market which started in mid 2015. Hedges for LIVE Cattle have been rolled down aggressively, financing or extending the life of the hedge. I recommend letting all hedges work from here forward, in case my analysis is wrong, and would not look to roll down again until we can work a 1:3 or 1:4 ratio. We will be rolling June puts up at a 1:4 or greater ratio if given the chance. Moore Research has a seasonal buy for December Live cattle starting April 20th. Live cattle did not have enough price movement to
“roll” our put positions this week.
Feeder Cattle have a substantial amount of seasonal upside left to them (May – June). That’s relative to time, not necessarily to price. The need for a corrective pull back has been satisfied. Similar to Live Cattle I view this as a correction to a minor bull market, within a major bear market. The reversal low made 4/7 still stands. To maintain faith in the seasonal we need to see feeders build bullish momentum moving away from the reversal low. Moore Research has a seasonal buy for August feeder cattle starting April 20th. We didn’t alter any existing feeder cattle positions this past week.
May feeders started the week with a potential initiating gap left open below the market on Friday. Unfortunately, by Tuesday the gap had been filled, and more. This negates the gap of any technical significance. All week May feeders struggled to maintain any bullish momentum, with all but one day closing at or near the lows of the day. The only good technical news was that there wasn’t any significant damage done to 4/7/2016’s reversal low. Of note, April feeders still have viable reversals from 3/31 and 4/7, and their up trend line. Hopefully the upcoming seasonal will give us another try at resistance at 165 and 166. Of course, first we need to get beyond the topside of the recent trading range established around 155 that has stalled both reversal attempts.
Short term trend is neutral.
Moving averages are negative.
Down Side Targets
Reversal low at 146.975
Support at 146.65.
142.65 support is the yearly low. If the market takes out and closes below 142, my mildly bullish attitude will have been confirmed 100% wrong.
Topside Targets (longer term)
I still like the gap at 173 up to major resistance at 184, but the market needs to build bullish momentum, and of course, get through major resistance at 166.
Given the extent of the selloff from resistance at 166, our first goal will be to get back to 166.
All options have been rolled down one time, covering the cost of the hedge. As we are using house money at this time, we will be letting hedges work, and not looking to take profit to the down side until we can work a 1:3 or 1:4 ratio. The calls we placed against our puts are still viable. We did not exceed a 1 call vs 2 puts ratio. This will not protect very much of the put profits, but divided by the number of puts, costs us less than 1.5$ of protection if the market continues lower. Rolling down would have cost us 4$ of protection. We will be rolling puts back up using between 1:4 and 1:6 ratios if given the chance.
For Cattle to be sold by the end of May, with hedges in place starting around the 162 May level, I would look to maximize basis and put value by forward contracting in this down market. I would buy the cattle back with May calls. I realize this is counter intuitive, but if it works you are locking in a better basis than you will probably receive if the market makes it back to 166, and with the calls in place you may be able to double dip a little bit of the trading range feeders have been in. The rough math works like this: forward contract a 750 lb steer at the feeder index of 156, plus approximately $8 put profit. Spend $2.65 on May calls, $2 out of the money. Worst case is you lose the call premium and you dollar out at 161. If May goes back to 166 you would dollar out better than 170. In my opinion this is the only way you could dollar out at 170 with May feeder futures at 166.
May Feeder chart sourced from RJO Vantage 4/15/2016
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