TWO FUNDS OFFER WAYS TO PARTICIPATE IN RISING AGRICULTURAL COMMODITIES -- IPATH GRAIN ETN OFFERS EXPOSURE TO CORN, SOYBEANS, AND WHEAT -- COFFEE AND SUGAR ETNS OFFER ENTRY INTO THOSE TWO RISING MARKETS
AGRICUTURAL MARKETS SHOW COMMODITY STRENGTH ... With all of the recent focus on the trend of commodities like gold and oil, it shouldn't go unnoticed that agricultural commodities turned up sharply during August. Perhaps the best known vehicle for trading that commodity sector is the Power Shares DB Agricultural Fund (DBA) which is shown in Chart 1. The chart shows the DBA hitting a new four-month high during August and breaking a six-month down trendline in the process. The DBA/DBC ratio below Chart 1 shows the agricultural ETF outperforming a broad commodity fund (DBC). I'd like to bring to your attention, however, to another vehicle for trading that sector which is the iPath Dow Jones -UBS Agriculture ETN (JJA) shown in Chart 2. The two charts look pretty similar, although there are some minor differences in their recent performance.
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Chart 1
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Chart 2
COMPARISON OF TWO AG FUNDS ... Chart 3 compares the relative performance of the two commodity funds. Since January 1, the DBA (black line) has done a bit better than the JJA (blue line) by a margin of 5.4% to 4.07%. Since July, however, the JJA has risen twice as fast as the DBA (15% versus 7.4%). That superior performance by the JJA is due mainly to how the two funds are weighted. Both funds include grains (corn, soybeans, wheat), and softs (coffee, cotton, sugar). The DBA, however, includes livestock markets (cattle and hogs) as well as cocoa which are excluded from the JJA. Since those three markets are among the weakest commodities at the moment, that alone probably accounts for JJA's better performance. Also the fact that corn and soybeans are the heaviest weighted commodities in the JJA and are among the strongest commodity performers. Both funds give a higher weight to coffee and sugar which have been relatively strong as well. The bottom line is that either fund offers a good way to participate in an agricultural rally. At the moment, however, the JJA has a slight edge because of its heavier weighting in grains.
Chart 3
WAY TO TRADE GRAINS... The iPath Agricultural Fund (JJA) offers a way to further fine-tune one's commodity choices. Chart 4 plots the iPath Grains Subindex ETN (JJG) and shows it breaking a six-month down trendline. The JJG has gained 20% since July 21 and is the strongest part of the agricultural space. The grain ETN includes corn (40% weight), soybeans (38%), and wheat (21%). Corn and soybeans are trading at new highs and are commodity leaders. Wheat is lagging behind but is also trading at a two-month high. Weather problems are the main reason for those recent gains which have little to do with economics or the state of the economy.
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Chart 4
COFFEE AND SUGAR ARE GETTING MORE EXPENSIVE ... You can fine-tune your choices in the soft commodities as well. The two strongest commodities in that group are coffee and sugar. Chart 5 shows the iPath Sugar ETN (SGG) challenging its early 2011 high near 105. It's another big commodity leader. Coffee is another commodity that's getting more expensive. Chart 6 shows the iPath Coffee ETN (JO) rising sharply during August to a four-month high. With gold looking very expensive, and economically-sensitive commodities like copper and oil tracking the stock market closely, agricultural commodities are a non-correlated group that may be worth exploring for more diversification. For those looking to expand their commodity coverage outside of the traditional energy and metal markets, the agricultural ETFs and ETNs shown above offer some ways to do that
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Chart 5
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Chart 6
HISTORY OF THE VIX ... Chart 7 compares the CBOE Volatility (VIX) Index (red line) to the S&P 500 (top line) over the last 15 years. The first thing to note is that the VIX and stocks usually trend in opposite directions. That why a rising VIX is considered bearish for stocks. But VIX levels are also important. Chart 7 shows that VIX values around 45 have, in most past instances, marked a bottom in the stock market. The only exception to that was during 2008 when the VIX rose to 80. The vertical lines show that each downturn in the VIX from above 40 led to an important market bottom. Chart 8 shows this summer's VIX upturn stopping right at the spring 2010 level (48) which ended a market correction. That's a good sign for the market. Chart 10 shows the VIX in the process of testing support around 30 which is the low reached in mid-August and the March high. That's an important test for the VIX and the market. A rebound in the VIX from these levels could weaken the market rally. A decisive VIX close below 30, however, could keep the stock market rally going awhile longer.
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Chart 7
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Chart 8
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Chart 9
NASDAQ TESTS RESISTANCE NEAR 2600... One of the tenets of chart analysis is that a broken support level should act as overhead resistance on any subsequent rally. Chart 10 shows that the Nasdaq Composite is in the process of testing broken support levels formed during March and June around 2600. The blue Fibonacci retracement lines show that the Nasdaq has also retraced 50% of its summer drop which is another potential resistance barrier. The Nasdaq is the first of the major U.S. stock indexes to reach those resistance levels, and what it does from here will help determine the strength of the current rally.
