Getting Technical

Commodities Rally Looks Strong and Broad on the Charts

It’s not just gold and oil: Agricultural products are on the rise. Even Deere and DuPont are up.



Not many individual investors have experienced trading in the commodities pits, but they should pay attention to what is happening there right now. Commodities from sugar to soybeans look quite strong, and that is giving commodities-related stocks a boost, too.
 
You don’t have to have conviction on pork-belly futures to participate. The PowerShares DB Agriculture fund holds positions in a broad array of agricultural commodities, and after a choppy May it erupted higher two weeks ago (see Chart 1).

Chart 1

PowerShares DB Agriculture Fund


Sugar, corn and soybeans were already in strong rallies, then lean hogs and coffee joined the party in a big way. Of course, after such a big move in such a short period of time, the fund is a bit overbought.
 
It would not be a surprise to see it work off some of its excesses. Rather than wait for a conservative play in what is now a volatile item, however, investors should investigate how this newfound strength finds its way.

The Materials Select Sector SPDR exchange-traded fund holds stocks from several parts of the basic materials groups from gold to steel to energy services. I wrote about gold and silver in Monday’s column, saying that gold stocks are surging and the mining sector had broken out on heavy demand.
 
The chart shows a strong rally this year as the ETF outpaces the broad market (see Chart 2). Money is flowing in at a fast clip as indicated by the on-balance volume technical indicator. We looked at this indicator for gold stocks Monday and saw huge inflows, presumably as demand swelled. The same is true, albeit more modestly, for basic materials.

Chart 2

SPDR Materials ETF

Of course, with gold miners — up 85% this year — being part of the basic materials group, this is not much of a surprise. However, it is chemicals, not gold, that holds the heavyweight position with all nine of the top holdings of the ETF. Giants Dow Chemical and DuPont have nice year-to-date gains.
 
Fertilizer maker Agrium ( AGU ), which is not a component of the ETF, looks even better.
 
Last month, this stock moved above and tested a two-year trendline with very strong on-balance volume readings (see Chart 3). Only a few days ago, it moved through short-term resistance as well as its 200-day moving average. It even reversed its trend of relative underperformance versus the market to outperformance.

Chart 3

Agrium

Here, too, short-term momentum readings are a bit high, leaving the stock prone to a small correction. The trend is now clear to the upside, however, so Agrium has a good chance to reach even higher in the coming weeks.
 
Finally, there is an ETF that covers many different types of stocks involved in agriculture. The VanEck Vectors Agribusiness ETF is in a powerful rally this year and just broke through a strong resistance ceiling that had been in place since last summer (see Chart 4). The ETF contains such familiar names as the giant food processor Archer Daniels Midland) and farm equipment maker Deere. Both of these stocks are now in good technical shape, which is a positive change for the latter.

Chart 4

VanEck Vectors Agribusiness ETF

With commodities in general on the move higher, there is one notable exception — copper. This economically sensitive metal continues to trade near multiyear lows. It had a particularly bad Tuesday as rising stockpiles suggested that demand in China was not materially improved despite Beijing’s economic stimulus.
 
Unlike its fellow metals markets, Dr. Copper remains in a long bear market.
 
While recent changes in agricultural commodities were most dramatic, almost all widely followed markets look much better on their charts. In fact, the Bloomberg Commodity Index, which tracks a wide array of commodities and is nearly one-third weighted in energy, is already up more than 20% this year and looks ready to continue.
 
It is a tough pill for fundamental analysts to swallow given weaker economic numbers and an absence of inflation. The charts, however, do not give us the “why”; they only tell us what actually is happening.
 
To quote an old Indian proverb, “Eat the mangoes, do not count the trees.”

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