Seasonal Sector Trades: June’s Seasonal Lows Setup High Probability Longs
By: By Christopher Mistal & Jeffrey A. Hirsch
June 04, 2015
Beef prices tend to form a seasonal high in March as packers have purchased inventory ahead of the summer grilling season. Then as grill masters supplement steaks and burgers with pork ribs, chicken and other delicacies, beef consumption starts to decline in the hot weather. But beef supplies also begin to dwindle as feed lots are short on inventory. 
Live Cattle prices typically hit a seasonal low in mid- to late June and then begin to rise before the school season begins as federal government subsidies for school lunch programs kick in for beef purchases. Consumption continues to increase through the winter and holiday season, generally keeping cattle futures prices higher through mid-February.
Our top longer-term seasonal play for live cattle is to go long the April 2016 contract near the usual June low on or about June 18 and hold it for 160 days until about February 6. Over the past 45 years this trade has been positive 30 times for a success rate of 66.7%. Prior to last year, the previous four years were stellar. 2010 registered the largest gain in this trade’s 45-year history and those four years combined account for more than half the historic gains. Last year, seasonal strength ended early with a late November high. A simple trailing stop loss would gain turned last year’s mild loss into a potentially sizable profit.
[June Long Live Cattle (April 2016) Trade History]
The weekly chart below depicts the Live Cattle continuous futures contract with iPath Bloomberg Livestock Sub-TR ETN (COW) overlaid in the solid black line to illustrate how the two instruments trade nearly in tandem. Traders may want to look at futures and options strategies, but others may find COW an adequate trading vehicle.  In any event, beef is poised for its typical seasonal move up from an early summer low to a mid-winter peak.
[Live Cattle (LC) Weekly Bars (Pit Plus Electronic Continuous contract) & Seasonal Pattern since 1970]
COW is thinly traded averaging just about 8,000 shares per day on average over the past three months, but volume does pickup when Live Cattle (or lean hogs) begin to move. As of April 30, 2015, COW was 60.13% Live Cattle and 39.87% Lean Hogs. Caution should be taken with COW. This Exchange-Traded Note, like other unsecured debt securities with no principal protection, carries inherent risk, primarily issuer credit risk, and the risks with COW may be greater. PLEASE READ THE PROSPECTUS, CONSULT YOUR FINANCIAL ADVISOR AND CONDUCT YOUR OWN DUE DILIGENCE. COW will be added to the Almanac Investor ETF Portfolio at today’s closing price. Use a buy limit for COW of $27.02. If purchased, a stop loss of $25.50 is suggested.
[iPath DJ-UBS Livestock Sub-Index ETN (COW) Daily Bar Chart]  
In addition to Live Cattle seasonal strength beginning in June, Cocoa, Wheat and Sugar also begin seasonably favorable periods in the month. Outside of the futures market, iPath Pure Beta Cocoa ETN (CHOC), Teucrium Wheat (WEAT) and iPath Bloomberg Sugar ETN (SGG) correlate well. However with the exception of WEAT, all have traded less than 40,000 shares per day on average over the past three months and holdings are generally meager presenting further liquidity concerns. PowerShares DB Agriculture (DBA) is a good alternative as it provides exposure to eleven different commodities: Feeder Cattle, Cocoa, Coffee, Corn, Cotton, Lean Hogs, Live Cattle, Soybeans, Sugar, Wheat and Kansas Wheat. DBA has assets approaching $1billion and trades nearly 400,000 shares per day, offering plenty of liquidity relative to other choices. DBA will be added to the Almanac Investor ETF Portfolio at today’s closing price. Use a buy limit for DBA of $22.45. If purchased, a stop loss of $21.50 is suggested.
[PowerShares DB Agriculture (DBA) Daily Bar Chart]