Four Oversold Commodities ETFs Due For A Bounce
Most avid market followers know that the risk on trade has been off for a while now, but with news today that global central banks are looking to boost liquidity in international financial markets, better days may be on the horizon for commodities and we're not just talking gold and oil.
Commodities of all stripes benefited from the Federal Reserve's second round of quantitative easing in 2010 and if the Fed, European Central Bank, Bank of Japan and others travel down QE Boulevard again this year and into 2012, taking a look at some oversold commodities exchange-traded products right now might be a pretty good idea.
The various tumbles endured by commodities ETFs and ETNs this year means there are some values to be had in the space and with that, let's have a look at four oversold commodities ETFs and ETNs that might tack on big gains from current levels.
iPath DJ-UBS Cotton TR Sub-Index ETN (NYSE: BAL): Remember when the iPath DJ-UBS Cotton TR Sub-Index ETN was the toast of the town? Remember when this ETN was trading over $117? Yeah, those days are hard to recall with BAL trading below $58. A scorching summer in Texas should have been good news for BAL, but the ETN resides at lower prices today than it did in August.
Fundamentals for cotton aren't great right now, either. China recently made a massive cotton purchase and BAL hardly moved. Europe's debt crisis has traders concerned about a crimp in cotton demand and a slower U.S. economy could have the same effect.
That's the bad news. The good news is any good news out of Europe or regarding the U.S. economy could positively impact cotton futures in the near-term and with BAL below $60, any move above the resistance area would squeeze the shorts and fan a longer rally.
Teucrium Corn ETV (NYSE: CORN): This is one fund that we want to love and have in the past, but at the moment it's probably too bold to be overtly bullish on CORN. While other commodities arguably have more moving parts so to speak when it comes to pricing, China is the 800-pound gorilla in the corn room. That's fine when the world thinks the Chinese economy is flourishing, but quite bad when the opposite is believed to be true.
That explains a roughly 22% plunge for the Teucrium Corn ETV in less than three months. The good news is two-fold. Domestic corn demand is still pretty robust thanks to ethanol production and CORN seems to be honoring support at $38 by not even dropping that far. Patient and risk-tolerant buyers can get involved with CORN, add to the position over $42 and look to get out in the mid-40s.
PowerShares DB Agriculture Fund (NYSE: DBA): The PowerShares DB Agriculture Fund is a great idea for the indecisive agricultural commodities investor as the fund offers exposure to cattle, coffee, corn, cotton, hogs, soybeans, sugar and wheat. And that would also explain why DBA has lost almost 25% of its value from its 52-week high. MKM Partners recently told Barron's the technical outlook for DBA isn't pretty.
We'd agree, but central bank liquidity gambits could improve DBA's technical health rather quickly. Until the ETF drops below $28, it's probably too risky to short. Above $29, DBA might be a long trade.
ELEMENTS Rogers International Commodity Metal ETN (NYSE: RJZ): RJZ doesn't grab much press, but it the ETN has utility for investors looking to gain exposure to a broad swath of metals, both precious and industrial. Gold, silver, platinum, aluminum and copper, among others, are found here in futures form. Below $10.50, RJZ is a sell.
Bull Case: The global economy rebounds in a big way, led by the U.S. and China. Europe gets its act together. QE 3 would certainly help.
Bear case: Risk on remains off. Major economies trim demand for industrial metals and agriculture commodities. In that scenario, all of the funds mentioned here would be hurt.
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