Feeders/Live Cattle Spread
On December 12th the April feeder/live cattle spread closed broke the October low and closed at 59.70. This signaled a bearish trend change and triggered a short sale signal.
The IMC blog made a hypothetical trade by selling one 50,000 lb. April feeder cattle contract at approximately 221.10 and simultaneously buying one 40,000 lb. April live cattle contract at approximately 161.40. This puts us in a short spread position at approximately 59.70 (premium feeders). Initially, we will liquidate the spread on a two-consecutive day close above 69.25.
History indicates that feeders normally have a premium of 10 to 15 cents over the live cattle. If so, ‘normal’ is a long, long way down from here. If the new bear market takes hold the feeder/live cattle spread should be in for a substantial decline. We will be monitoring the price action to see if there is any opportunity to add to the short position.