Agriculture Strength Not Confirmed By Stocks
Michael A. Gayed | Jul 25, 2012 06:47AM ET
“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.” - Tacitus
Much media attention has been focused on the on-going drought here in the United States and the effect its had on wheat, corn, and other soft commodities. The move has been by all means a powerful one, as crops get destroyed nationwide. However, I would argue that the move was a long-time coming, and that the drought was simply a catalyst. Take a look below at the price ratio of the PowerShares DB Agriculture ETF (DBA) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/DBA is outperforming (up more/down less) the denominator/IVV.
Agriculture has been a tremendous laggard relative to equities since September 2011, as the Summer Crash of 2011 was well underway. The ratio was a stunningly consistent underperformer following the Fall Melt-Up in equities, falling to 3 year ratio lows. The most recent spike is clearly attributable to the drought, but given how depressed performance was to begin with, it would make sense for such a big move to occur.
However, the rally may just be a relief trade. I say this because some very recent weakness is now hitting the stock side of the equation. Take a look below at the price ratio of the Market Vectors Agribusiness ETF (MOO) relative to the S&P 500 (IVV).
Notice that MOO seems to be unable to trend higher and outperform, which is providing a different message than what is being sent through DBA. The implication is that the stock side of the story remains unconvinced. So while the rally in soft commodities was a long time coming, it is unclear if a new trend in leadership is here until agriculture stocks confirm strength.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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