Live cattle and lean hog futures can be combined in a 61%-39% approximation of the ETN proportions. “COW and combo” (below) contains the original cumulative percentage changes of COW ETN prices and the combined prices for December 2012 live cattle and lean hog futures. Normally, with a chart of this type, the purpose is to look for spread possibilities; however, with two price series that are different manifestations of the same underlying assets, it is necessary to explore another trading approach. The two series tend to rise and fall at the same time with slightly different highs and lows.
Because of how the price changes are situated, the combo may be used to forecast changes in the COW ETN price. Because COW is calculated off of live cattle and lean hog futures, the cause and effect for price changes must run from combo to COW. It is easy to think of combo as the COW’s shadow. You cannot outrun your shadow, and neither can the COW price stray too far from the combination of cattle and hog futures prices.
The combo is an estimated index used in conjunction with Barclays’ formulation of the COW price. However, “COW and combo” implies a close fit between changes in the two price series. The shadow approach may give an edge to a trader of the COW ETN.