Live cattle trade at CME Group ended a volatile week Friday at 92.125¢ per lb., down 2.1% since the previous Friday though up +0.7% for the day. The June contract has made a nice recovery since bouncing off the 86 support area at the start of April, but does it have farther to run? Hedgers don't think so, as evidenced by the weekly commitment of traders (COT) report, hedgers are extremely short. The cattle-herders been persistent bears even as CME.LC trades weak, under both its 50, 100, and 200 day moving averages. Have the ranchers been right in the past when cattle has been in a downtrend?
Q: During the second quarter, how has live cattle fared when, trading below its 100-day moving average, hedgers are extremely short?
A: There are 11 completed instances of the above query. Live cattle shows a strong bullish edge of 91% (10 of 11) that peaks after 19 trading days. Live cattle rallied an average of 3.43% in those cases, with the one loser being a manageable -0.9%. The trade's standard deviation, at 3.02%, leads to a Sharpe of 1.13 and a t-statistic (1% level) of +2.66. This time it looks like it pays to fade the Ranchers and buy some Cattle.
To see this idea in our EventEdge® analysis tool click here .
Jason Thompson is a Chicago-based speculator focusing on electronically traded derivatives and their underlying instruments.
