I know that this is dangerous business but let’s do it anyway, just for fun.
Looking at the LC chart below. It looks to me like LC have been trading in a wide sideways channel since back in August or September. Sideways channels indicate a market “at rest”–i.e. not trending one way or the other.
We also know that, eventually, price will “break out” of that channel–we just don’t know when or in which direction.
So, now I’ll throw it back at you. If you were a betting person (and if you are in the un-hedged cattle business you are a betting person), which way would you bet the breakout is going to be–top side or bottom side? — jtl
The better the cash news this week, and believe it or not there is another round of bullish beef news this morning, the greater the panic selling as CME live cattle futures touch limit down for the second day in a row.
Fund Rebalancing Linked to Sell-off
The reason for this early January meltdown is primarily being linked to fund rebalancing. Caution about fund reweighting occurring between January 8 and 14 was circulating back in November but after the enormous sell-off in the cattle complex in December accompanied by a huge drop in open interest, taking OI to the lowest level since January 2010, many thought some, most or all of the rebalancing had already occurred.
A quick word about commodity funds. The two major commodity indices are S&P Goldman Sachs Commodity Index (GSCI) and the Bloomberg (BCOM). Although private information, the funds mathematically evaluate commodity performance and exposure and increase long exposure in some markets, like crude and cotton this year, while decreasing long exposure in others.
This year’s annual rebalancing was to include a reduction of live cattle longs held by the funds in upwards of 10k contracts. Until this threat is seen as having passed, bargain hunters will be scarce and fundamental cattle traders will be trounced.
Short term technical indicators are inarguably bearish, monster outside week with a lower close and back below the 100 day moving average. Many traders say the market is rejecting good news, but it is very difficult to tell the forest from the trees with adrenalin pumping.
Where Does the Market Catch?
Picking a bottom in a wash-out like this one is always a matter of when more than where. The low made week before last, $160.32 spot chart and $159.07 in Feb LC may or may not hold. Traders will be watching daily CME open interest to try and gauge when the tsunami of selling will cease. This coupled by the market action itself give critical information as to when another low is certain.
The extreme disconnect between futures and cash will return as a factor next week at some point. Feb LC is trading $10 under this week’s cash fed cattle average. Boxed beef prices will continue to increase next week supported by grinding beef demand and limited offerings. Packer margins will improve also next week, since futures weakness aid packers in purchasing cattle next week no better than steady and possibly lower.
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Disclaimer: The Beef, CBP nor Cassie Fish shall not be liable for decisions or actions taken based on the data/information/opinions.
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