Rollover and Keep Riding the Bear Market
The blog entered a short position in the October feeder/live cattle spread at +$45,747.50 (premium feeders) on June 30th. October starts on Thursday so it’s time we roll this thing over.
The spread between November feeders and December live cattle is trading at a discount to the October spread. Nonetheless, the current level is still historically a good place to be short from. At a current price of approximately +$35k (premium feeders) we can expect another $10-15k of downside from here. Heck, anything above $15k used to be considered ‘pricey’ in the feeder/live cattle spread. Therefore, the ultimate destination of this spread could be significantly lower. Hopefully, we’ll see a few bounces of at $2-3K or more along the way. This could provide us with setups to add to the short position.
At today’s low of 1.65:1, the ratio between the value of one November feeder contract and one December live cattle contract is still at a level that has only been seen half a dozen times in the last half a century. This confirms that feeders are still historically overpriced in comparison to live cattle. The confirmation gives us a green light to maintain short positions and even add to them.
Based on the history of this ratio, it is not unreasonable to expect the ratio to return to 1.4:1 or lower. It has been two and a half years since the nearest-futures ratio has been this low. Previous monthly excursions above 1.4:1 were either side of two years in duration, so a return to 1.4:1 is overdue.
Furthermore, each time the ratio has reached 1.6:1 or higher it has always turned over and dropped back down to 1.3:1 or lower. It sort of acts like a pendulum where a run to one extreme end of the historic price range is often followed by a reversal that takes it back to the mean and beyond. This provides plenty of trading opportunities for the savvy spread trader.
For tracking purposes, the blog will roll the October feeder/live cattle spread to the November feeder/December live cattle spread at the market-on-close on Tuesday, September 29th.