Agriculture Strength Not Confirmed By Stocks

“Truth is confirmed by inspection and delay; falsehood by haste and uncertainty.” - Tacitus

Much media attention has been focused on the on-going drought here in the United States and the effect its had on wheat, corn, and other soft commodities. The move has been by all means a powerful one, as crops get destroyed nationwide. However, I would argue that the move was a long-time coming, and that the drought was simply a catalyst. Take a look below at the price ratio of the PowerShares DB Agriculture ETF (DBA) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/DBA is outperforming (up more/down less) the denominator/IVV.

Agriculture has been a tremendous laggard relative to equities since September 2011, as the Summer Crash of 2011 was well underway. The ratio was a stunningly consistent underperformer following the Fall Melt-Up in equities, falling to 3 year ratio lows. The most recent spike is clearly attributable to the drought, but given how depressed performance was to begin with, it would make sense for such a big move to occur.

However, the rally may just be a relief trade. I say this because some very recent weakness is now hitting the stock side of the equation. Take a look below at the price ratio of the Market Vectors Agribusiness ETF (MOO) relative to the S&P 500 (IVV).

Notice that MOO seems to be unable to trend higher and outperform, which is providing a different message than what is being sent through DBA. The implication is that the stock side of the story remains unconvinced. So while the rally in soft commodities was a long time coming, it is unclear if a new trend in leadership is here until agriculture stocks confirm strength.

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