Livestock Seasonality Trading Analysis

Seasonal strategies, by their very nature, are oblivious to the current market. How can that be? A seasonal strategy is simply an isolated but specific calendar period during which a market (or spread) has shown a consistent propensity to move in the same direction during a number of past years.

Methodology of Analysis

MRCI's computer system scrutinizes the last 15 years of historical price data for those trends recurrent, with a minimum reliability of 80%, during similar time windows. Those strategies are then subjected to further criteria established for average profit, duration of time window, duplication/overlap, and contract delivery/expiration. Historical detail tables (strategy sheets) present each historically reliable seasonal trade with a table of its relevant detail.

Identifying Seasonal Patterns

MRCI’s seasonal charts consists of up to three time aspects of a market's seasonal pattern — up to the most recent 30-year pattern (magenta line), the most recent 15-year (black line) and its most recent 5-year (red line). Thus, any evolution in the pattern may be perceived as well as trends, tops, and bottoms coincident to both. The numerical index to the right (or left) measures the historical tendency for the market to make a seasonal high (100) or low (0) at a given time during the year. There is no further significance to this value.

Besides illustrating the more obvious seasonal tops, seasonal bottoms, and seasonal trends, these patterns also suggest certain cause/effect phenomena which may present secondary opportunities. For instance, do smaller but well-defined breaks/rallies typically coincide with certain events, such as Thanksgiving or first deliveries against a lead contract?

Outright strategy: Long Dec Live Cattle 11/12 - 11/27

(Click the chart to access an interactive chart)

Strategy Description: With seasonal cattle slaughters usually peaking in May/June, feedlot numbers are often at their nadir in the heat of August — not coincidentally when feed supplies are low, prices can be high, and retail beef consumption low.  Operators replenish those numbers in October/November in order to take advantage of plentiful feed at corn harvest, but feeder cattle normally require four to five months to reach market weight.  Thus, cattle slaughter tends to be low in December and deliveries more eagerly sought as the approaching winter will generate retail beef demand.

Spread strategy: Long June/Short Feb Hogs 11/20 - 1/12

(Click the chart to access an interactive chart)

Strategy Description: Because hog producers want to feed as many animals as possible when feed is most plentiful and usually least expensive, hog marketings traditionally peak in or by early December as corn harvest draws to a close. Slaughter then remains at a high plateau for a few weeks before beginning to decline into its seasonal nadir in May/June. Because hog futures are essentially a market for live animals rather than a storable commodity, seasonal disparities in supply and demand are built into the price structure. Thus, as slaughter is peaking and prepares to decline, hogs marketable when slaughter is low tend to be progressively awarded a premium over those marketable when slaughter is high.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME 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 IMPACT ON THE RESULTS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST OR WILL IN THE FUTURE ACHIEVE PROFITS UTILIZING THESE STRATEGIES. NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. RESULTS NOT ADJUSTED FOR COMMISSION AND SLIPPAGE.

 

Disclaimer: This information was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.

About the Author

Since 1989, Moore Research Center, Inc. has provided futures traders with keen historical research and seasonal analysis. MRCI does not make predictions, or in any way attempt to offer trading advice. Our company deals strictly with the past, with analysis, and understanding how correlations and patterns can guide you to a trade which might recreate its seasonal pattern.

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