Agriculture Stocks Are Smoking - But For How Much Longer?

As gold and crude shoot up, up and away, a lot less attention has focused on another commodity that’s also smoking—agriculture.

The year-old PowerShares DB Agriculture Fund (DBA) is up 20 percent since mid-August. The fund tracks the Deutsche Bank Liquid Commodity Index for corn, wheat, soybeans and sugar, the four most highly traded agriculture-related futures contracts.

Despite all the attention on the soaring Euro or gold, corn futures are actually more liquid. It was only this year, however, that investors could get in on the sector without buying derivatives.

So what’s agriculture doing now? DBA is in a strong uptrend on the charts that may have some investors wondering if a top is looming, much like for other high-flying commodities. (Another way to trade the sector is the MarketVectors Agri Business ETF (MOO) — with its great ticker symbol —which started trading in September and owns a basket of agribusiness companies like Potash Corp. (POT); Deere Co. (DE); and Tyson Foods (TSN).

DBA saw a nasty selloff in October, then rebounded smartly, only to sell off again in early November with the broader market.

COTs Bullish for DBA, But Warn of Possible Weakness

For a glimpse into what the future holds for DBA, I like to take a look at the Commitments of Traders reports—the data on futures and options holdings of large traders that’s issued free every week by the U.S. Commodity Futures Trading Commission.

My take: the COTs data is overall bullish for the agriculture sector, although there are some warning signs of possible weakness. I’ve developed a composite agriculture index based on the COTs data for wheat, soybeans, corn and sugar and then developed statistically robust, market-beating trading signals for the DBA ETF based on this index. The index flipped to bullish with the Aug. 14 COTs report, nicely catching the recent run-up for DBA.

As of the latest COTs report issued Nov. 9, however, the index turned down somewhat. It now stands at a reading of 0.25, down from the previous week’s 0.57. (A reading of “1” means all four setups for wheat, soybeans, corn and sugar have just given a bullish signal, with the trade to be executed for the open of next week’s trading. A “-1” reading means a bearish signal across the board.)

While the 0.25 reading still shows a bullish tilt, the drop from the previous week suggests more weakness or sideways action is possible near-term for DBA.

Looking more closely at the COTs data, I see the decline is due almost entirely to an increase in bullish sentiment among the “dumb money” large speculators in soybean futures and options. Still, the move wasn’t enough to change my signal in my setup for soybeans, which remains bullish.