Varilek’s Cattle Call: Funds still in liquidation mode
Last week, we experienced a shift in the live cattle market. Prices took an aggressive correction. This was primarily fund driven action with fundamentals not playing much of a roll.
The record open interest run in the live cattle came to an end, with large liquidation of the record long funds in the cattle futures. We felt like a broken record talking about the funds position, but the evidence has shown why that demanded so much attention. The danger of such a large long position would be hard to unwind in a smaller volume market such as the live cattle.
As we mentioned before, fundamentals were not the reason for the large break. The cash market remained stable last week with $127-$128 live in the north and $126-$127 live in the south. Some of these trades were for the 2nd week of May. The missing positive basis that I have been whining about is finally back, but unfortunately due to the large break in the market.
The charts show significant damage after the drop in futures. We are trading below supportive trendlines and key moving averages. Those bearish signals are keeping the funds in liquidation mode, putting further pressure on the market. It will take more than just a couple days for the funds to exit the large amount of positions they have.
After all that negative news, there is a seasonal to buy feeders in the end of April. Due to the volatility, up to this point, we have ignored that plan. I am waiting for this dust to settle before I make any bold moves. As fund liquidation is eminent, this why we have a plan for protection. Once the fund roll is complete, we can go back to putting more stock in to the fundamentals.
Scott Varilek, Kooima Kooima Varilek Trading
The risk of loss when trading futures and options is substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.