We frequently discuss the effectiveness of using the commercial trader position as a proxy for fundamental data. We began looking at this years and years ago in the agricultural markets due to the inelastic nature of these annual markets. Adding that these markets are controlled by individuals whose livelihoods are based on the successful calculation of supply and demand and you begin to see the value in their collective forecasting ability. Thus using the commercial hedging activity as a proxy helps put us on the side of the sellers when there is forward production to be sold above their predetermined value area just as the end users put us on the side of the long hedgers supporting undervalued prices.
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.
This was a quiet week for our trading in spite of the explosive moves created by the Fed. Those brave souls willing to take currency positions ahead of the announcement based on our Discretionary COT Signals were handsomely rewarded as our COT Sell Signal in the U.S. Dollar Index was sent out before 10pm on the 17th.
Our focus took a macro view as we attempt to assimilate contradicting indicators into a general thesis upon which to base our long-term trading. We found, “Hidden Strength in the S&P 500,” in our piece for Equities.com. Once again, ahead of the Fed’s announcement.
This week, we took a step back and looked at the markets in groups. We focused on the metal and meat markets in general while only discussing specifically, a soybean meal trade.
Re-Shuffling the Metal Markets which we wrote for TraderPlanet focused on the growing commercial trader position in the precious metals. There’s no question they’ve been big buyers on the recent decline and their total positions are controlling a larger percentage of open interest with each additional contract they buy.
See our mechanical Soybean Meal program’s Equity Curve
We ended the week with a broad outline of the interaction between commercial traders and seasonal analysis in hogs and cattle. We featured the current seasonal charts by Moore Research and combined them with our own Commitment of Traders charts to demonstrate effectiveness of these tools when combined.
See all 9 charts and commentary in Hogs and Cattle Bottoming Out.
See the equity curve for the Meats Sample Portfolio.
There are three markets in the meat futures sector with enough volume and liquidity to attract both hedging and speculative activity. These are the lean hog futures along with the feeder and live cattle markets. The live cattle market is best thought of as cattle on the farm while feeders are the cattle that have made the journey from the farm to the feedlot for fattening prior to slaughter. We’ve written extensively on the broad nature of global supply and demand fundamentals within these markets and included links to our previous research at the end. This week, however, these three markets appear to be setting up for a classic trading opportunity.
Our Commitment of Traders live cattle trading program continues to excel having won 5 out of its last 7 trades. Furthermore, it looks like the current trade could be another big winner!
This is one of 33 completely mechanical programs whose instructions we deliver by email, nightly.
Once registered, you have access to all 33 which can be combined as you choose on our site to compile an equity curve that meets your trading needs.
The live cattle market was up 28% in 2014 and the Feeder cattle market was up 32% for the year. The cattle markets made all-time highs in 2014 as the U.S. had its smallest slaughter in 20 years. This came as no surprise as we’ve discussed the declining trend in the domestic herd several times. Based on the cheap feed prices, cheap fuel costs and a strong Dollar, this should be another year of declining supply as the U.S. begins to grow its herd to meet the growing foreign demand.