Agricultural stocks and commodities have significantly outperformed the market over the past two months and it finally made front page news last week after the HUGE takeover bid for Potash (POT) from BHP Billiton (BHP). Officially BHP is still chasing its kill and one must ask if this will end up like the failed Rio Tinto takeover circa 2007 that led to investors’ loss of interest. At any rate, this activity has fueled a monster move in the AgriBusiness (MOO) sector with a 16.8% outperformance of the market since July 1. The merger activity was sparked by the consensus estimate that agricultural commodities and the sheer price of food will increase at rates higher than expected. 
Agriculture commodities are moving higher – the PowerShares Ag Fund is up almost 10% since July, doubling the market’s performance over the same period. Of course, all things come to an end eventually, but I believe it’s too early to harvest profits. Every day I use three unique systems to analyze exchange traded funds on three different time frames (I call it the 3X3 strategy) so let’s walk through the current analysis on MOO using some of my TRADR strategies – you’ll find that MOO can still provide good nourishment for your portfolio.
Unlike many traders I’m not afraid to jump on a strong technically ‘overbought’ trend, I’ve found that the strongest trends continue to persist.
Don’t Harvest Profits Yet, Here’s Why
Market Conditions – It’s hard to look at any niche sector of the economy without also looking at the entire market – for example, AgriBusiness is positively correlated to the market so knowing the market trend is imperative. Don’t worry though it’s not that difficult to objectively time the market, TRADRs use our TrendScore to determine the direction. Outside of systematic signals traders look at seasonal patterns, like the election cycle or summer slump.
It’s hard to believe, but we’re just two months away from the mid-term election of a first term president, which have historically very bullish. According to Jefferey Hirsch (Stock Traders’ Almanac) the US stock market (SPY) has not seen a loss in the third year of an election cycle since 1939, period. What’s the bottom line for you and me? The fourth quarter is likely to be a great time to buy with respect to the following year.
This is where it gets hard. The current market is essentially trendless and now leaning to the bear side after last week so it’s hard to catch a falling knife. So what do you do? Whenever the market is weak smart traders and investors look for the leaders that lead the reversals. In this market that leader is clear, AgriBusiness (MOO), which has emerged as the leader in the previous week and it’s likely to lead the coming seasonal rally. Overall, don’t get to anxious to take profits on your agricultural based stocks or ETFs, they are likely to be persistent leaders.
Ag Commodity vs. Ag Stock – OK, let’s step back from the seasonal patterns and take a look at real time data with a real a trading system. There are a lot of relationships worth following in the market; NASDAQ vs S&P500, Gold Miners vs Gold, Dollar vs or AgriBusiness vs Ag-commodities (which we will focus on today). These relationships provide an insightful look into future price action, specifically when you look at relative strength. The chart below says it all.
Relative strength of any relationship can be determined by a simple process, here are the steps to creating an effective timing guide using relationships in the market.
1. NASDAQ Value / S&P500 Value = X (normalized number of true relative strength of NASDAQ versus SP500)
2. Plot longer-term moving average and shorter-term moving average of X Value (smoothed MAs expose the true trend of relative strength)
3. Track Cross & Confirmations of Moving Averages for buy and sell indicators
You can do this with a lot of different pairs out there – for today we are looking at the relative strength of AgriBusiness (MOO) vs. Agri-commodites (DBA). To get a real perspective of where MOO is going we are looking at the 20 day EMA and 60 day EMA (1 and 3 month moving averages) of the relative strength. You can see the buy and sell arrows based on the moving average crosses of the relative strength.
As you can see we are entering into another buy area as of this week. According to this relative strength pattern we’re going to see another few weeks (at least) of AgriBusiness bull activity.
Multiple Time Frames Agree – We’ve looked at a couple TRADR strategies, however, leveraging multiple time frames is perhaps the most powerful. I monitor weekly, daily, and hourly charts of 100 top ETFs everyday, here’s a quick look at that analysis on MOO
Overall, both daily and weekly charts are bullish based on my time-frame unique systems. Furthermore, on each time frame MOO has shown signs of weakness but NEVER confirmed bearish (areas highlighted with blue box). This shows how strong the trend has been.
MOO – Daily with Stochastics
MOO – Weekly with %R
Crops may be ripe for the picking and ready to harvest, but based on my analysis it’s not time to harvest profits on ag stocks. Based on the current market conditions we are likely to see an average of 10% gain over the year following the mid-term elections, which takes place this November. The leader of this year’s cycle has already emerged and it’s AgriBusiness so don’t exit too early. In support of the overall market is MOO itself, based on the relative strength assessment against DBA (ag commodities) we are on the brink of a new bull trend in this niche sector. And finally, shifting down to the most active trading analysis the daily and weekly charts are showing that bull trends are in place. Bottom line, even if we’re at a short-term high it’s not worth harvesting your profits on MOO or any other ag-stock yet — all signs point towards additional upside ahead.
