ETF Update: The Independence of Agriculture

One quest for the investor is to discover long-term trends.  The idea is to match investment objectives to the time frames of likely developments.  As long as one is willing to ignore the day-to-day results, this approach makes sense.  Of the many who find this attractive in theory, few are willing to stay the course.

Some months ago, a client asked us to set up a long-term portfolio.  He wanted market exposure, and he wanted edge.  He did not want active trading.  We always have ideas about long-term plays, and we were not surprised by the question.  This is not the occasion for our entire answer, but we can state that agriculture was part of the portfolio.

Before turning to this week’s featured sector, let us consider what other information can be gleaned from our weekly sector rankings.  Each week we reveal our own ratings (with a one-day delay) for a universe of ETF’s.  We develop the ratings  by looking for a combination of sector Trends, Cyclical moves, and a touch of Anticipation.  Since we apply this system to a selected universe of ETF’s we call it the TCA-ETF model.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

We are not recommending that readers make trades based upon our weekly report.  It is intended as a news supplement to your own analysis.  Those who are serious about following the method can do better through our formal management programs.  We are just trying to be helpful with the free information.

The conclusions from this week’s list are similar to those we reached last week.  The overall market is not strong.  The leading sectors all benefit from a weak dollar, with emphasis on energy and foreign stocks.

Focus on Food

If there is a single known element in the worldwide demand picture, it would be food. The world population is growing.  Many developing countries may be expected to build stronger economies.  Companies that provide agricultural products and services benefit from these secular trends. The same can be said for companies that provide agricultural equipment such as fastline. Tractors, as well as other harvesting and planting equipment and vehicles are crucial for farming operations to be a success.

We invest in agriculture via the Van Eck Global Market Vectors Agribusiness ETF (MOO).   The fund tracks the DAXglobal(SM) Agribusiness Index (DXAG).  It has about 50% US exposure.  Chemicals (fertilizers, etc.) are the top holdings, constituting 44% of the fund, but agricultural operations and equipment are also important.  The top five companies make up about 40% of the fund and the top ten constitute 2/3.  The P/E ratio is about 12.5.

An attractive feature of MOO is the potential for independence from the general market.  While strong markets can take all stocks up or down, during a period of consolidation there is a better opportunity for sectors that are not strictly tied to other market themes.

For those who like to compare their own chart reading with the model, here it is.


Other Comments

We regularly seek out expert opinion on the top choices from the model.  David Fry sees MOO as bumping up against resistance in a weekly chart he shows here.

We also like this article at ETF Grind.  It shows the potential for some sectors to “decouple” during a recession in developed countries.

Weekly TCA-ETF Rankings

Only 21 of our
57 sectors are in the
“buy” range, the strength is dropping dramatically for most.  The index
ETF’s are all in the penalty box.  It is a weak overall
picture, but not yet bearish.

Despite our “neutral” posture, the
portfolio had a great weak, gaining over four percent and beating our benchmark S&P 500 by more than 50 bps.  We were fully invested in energy and other weak dollar plays, as well as MOO.

Based upon the model signals, we continued our neutral position in the Ticker Sense Blogger Sentiment poll


Note for New Readers

Our weekly ETF Update is designed to assist both investors and
traders interested in ETF’s and Sector Rotation.  Before turning to the
current rankings, let us undertake a review for readers new to this

Our Method.  In this past article,
we described our basic methodology and why we believe the rankings are
useful for fundamental traders and technical traders alike.  While we
urge readers to check out the entire article, the key point is that
ETF’s pose challenges and opportunities different from investment in
individual stocks.  The fundamentals may be more difficult to assess. 
Even with a good grasp on fundamental trends, there is a lot of
technically-based trading in ETF’s.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the “hot money” moves.  Here is an article on that point.

The system synopsis.
We look at Trending sectors, Cyclical Sectors, and build in an element
of Anticipation for both entry and exit — thus the name of the model,
TCA-ETF.  While we do not reveal the exact methodology for spotting
trends and cycles, the system is not a “black box.”  The basic elements
are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings
each week, now on the weekend with a one-day delay, using the Thursday
output from the model.  We monitor and trade this daily, and offer a
free report (request via the email address on the top left of the site)
for those interested in our weekly trading program.

You may also like