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Rare fund anomaly makes feeder cattle futures a 'potential buy'

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Feeder cattle represent the best buy among commodities.

At least, according to one analysis technique, from Societe Generale, of weekly data on investor positioning.

The weekly data from the Commodity Futures Trading Commission on the relative positioning of the likes of speculators and index funds in agricultural commodity derivatives are already closely monitored for clues on how money flows may effect prices.

Substantial managed money net long, or net short, holdings, for instance, are seen as top heavy - increasing the vulnerability of derivatives to a price reversal.

'Mismatch zones'

But SocGen has added an extra twist by factoring in supplemental data in the reports showing too the balance of funds long or short in a commodity. Array

Q1 2017: 129 cents a pound

Q2 2017: 128 cents a pound

Q3 2017: 129 cents a pound

Q4 2017: 134 cents a pound

Q1 2018: 130 cents a pound

Forecasts given on a quarter-average basis, front Chciago futures contract

"A mismatch occurs when the net futures position is different to the net number of traders," SocGen said.

And such occurrences at least offer a "deeper understanding" of market positioning, and can herald changes in price trends.

"Mismatch zones can be viewed as potential 'transition zones', where positions are potentially being unwound and new and opposite positions established," the bank said.

'Potential buying opportunity'

One example of how such a mismatch might occur is down to a single fund possessing intelligence that the rest of the market does not have, and which suggests a change in price direction.

"This would perhaps be the most interesting scenario. It is also not that uncommon in commodity markets," SocGen said.

However, with mismatches "generally uncommon", opportunities to use them in trading strategy are relatively rare.

Indeed, in latest CFTC data, Chicago-traded "feeder cattle is the only mismatched commodity, with a net long position of 5,153 contracts, but the number of traders is net short by four.

The bank, flagging that it was anyway bullish on feeder cattle futures, and "considering the recent downtrend in feeder prices, this would be an example of a potential buying opportunity".

SocGen forecasts feeder cattle futures averaging 134 cents a pound in the October-to-December quarter, well above the 121.625 cents a pound at which the November lot was trading on Tuesday.

By Mike Verdin

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