Commodity Futures Outperforming Stocks

July 08, 2010

It's official: Commodity equities have finally ceded to futures, on the issue of performance. So what's behind their surprising decline?

 

 

You gotta give to ‘em: Commodity stocks had a great run. Note that I said had. Last week, the tide officially turned against equities, when a key support level in the relative strength charts of two producer-tracking ETFs was broken.

The Market Vectors Agribusiness ETF (NYSE Arca: MOO) and the Market Vectors RVE Hard Assets Producers ETF (NYSE Arca: HAP) are portfolios representing companies in the business of producing the commodities that make up the PowerShares DB Agriculture Fund (NYSE Arca: DBA) and the GreenHaven Continuous Commodity Index Fund (NYSE Arca: GCC), respectively.

We've been tracking the relative strength of the two stock ETFs to the futures-based ones since the HAP product launched in late 2008. Since then, it's generally been better for investors seeking commodity exposure—especially to the agriculture sector—to get it through the equities market rather than futures.

This spring, however, the relative strength of commodity stocks peaked, and last week's hammering of the equities markets drove the last nail into the producer ETFs' coffins.

Specifically, the head-and-shoulders top formations in the relative strength charts were completed with breakdowns below their so-called necklines (see chart below).

 

Commodity Stocks Vs. Commodity Futures

 

So, what does this mean? Are the ETFs short-sale targets now?

Well, perhaps, but that's not the point to be made here. Rather, the breakdown is a message to commodity seekers that going forward, there will likely be more bang for their bucks in futures-based portfolios.

Let's look more closely at the five biggest components of the two agriculture funds, MOO and DBA, to get a sense of their, um, futures by looking at their pasts.

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