Exploit the Seasonal Tendency Between Hog and Live Cattle Futures

Trading a futures spread means investors are long one contract and short another with the frame of mind that they are looking for the difference in prices to contract or expand and don't care if the direction of the market is up or down.

An example that may speak to many stock traders will be going short the S&P 500 and at the same time going long the Nasdaq 100. A trader can benefit even if the stock market in general goes down, as long as the Nasdaq 100 sector goes down less than the S&P 500 sector.

The same can be said on the flip side. The trader can lose money even if stocks in general go up, if the S&P 500 outperforms the Nasdaq 100.

The same concept applies to physical commodities such as gold, grains, meat, oil and more.

One spread, courtesy of Moore Research Center, is going long the hog market while at the same time going short the cattle market. This is a general idea and shouldn't be taken as a specific recommendation unless consulting with a license 3 broker.

The fundamental reason for this trade idea is that hog slaughter is high during and after corn harvest, whereas cattle slaughter remains low. However, demand for hogs is high because not only do retail grocers feature pork for the holidays but the industry begins to accumulate pork in cold storage for when slaughter is low in June.

By contrast, beef demand lags during the holidays.

Here is what the daily chart of each market looks like, followed by the chart of the actual spread:

Daily Chart of Lean Hogs

Charts Courtesy of CGQ

Daily Chart of Live Cattle

Charts Courtesy of CGQ

As shown, both markets are in a downtrend over the past few months with temporary bounces along the way.

Here is the chart of the actual spread, the difference between cattle and hogs:

Charts Courtesy of CGQ

What we are looking for as traders, if and only if, we like this trade idea, is for the hogs to get relatively stronger compared with the cattle market. To be honest, we don't care if both markets go up or down, as we are looking for the difference which is now at about -5,900 to become smaller or less of a negative number.

There are many advantages to using spreads as well as some disadvantages. Inexperienced traders should consult with an experienced broker before simply jumping into spread trading, but those who are serious about trading should familiarize themselves with the concept of spreads as another weapon in their trading arsenal.

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Seasonal tendencies are a composite of the more consistent commodity futures seasonals that have occurred over the past 15 years. There are usually underlying fundamental circumstances that occur annually that tend to cause the futures markets to react in a similar directional manner during a certain calendar period of the year. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may affect the results. No representation is being made that any account has in the past or will in the future achieve profits using these strategies. No representation is being made that price patterns will recur in the future.

The author is an independent contributor.

Trading futures and options involves substantial risk of loss and isn't suitable for all investors. Past performance isn't necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. Investors should therefore carefully consider whether such trading is suitable, in light of their financial condition. Any decisions investors may make to buy, sell or hold a futures or options position on the research displayed on TheStreet.com is done at their own risk. Some information may not be timely by the time investors apply or receive it. As such, they may apply information that is already priced in and doesn't present any trading opportunity.

 

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