TINA Melt-Up
Faced with no attractive alternative, stock investors are again being force fed. With a steady diet of low rates and permissive macro policy worldwide, there have been few catalysts to create a correction that would allow for a low risk entry point, like the one seen in late December. Volatility is again collapsing in a dangerous repeat of last year's complacency. The result - a TINA melt-up.
Although growth expectations have been receding, expectations of a positive U.S. - China trade deal have now been 'priced in' to the markets, elevating risk levels. So, are there any un-played diversification alternatives for reducing the highly correlated risks embedded in today's markets? Food for thought.
On the front burner of the long-awaited U.S./China trade deal is agriculture. With China being the largest importer of agricultural products in the world, and the U.S. a huge producer, beans are low hanging fruit, so to speak, of the improvement in the trade balance. The solution is obvious, remove the tariffs that have created an inventory glut of soybeans, wheat and corn.
Looks like a good time for investors to own a few magic beans.
The agricultural markets are prone to repeatable patterns produced by the seasons for obvious reasons.
As shown below, the odds of a seasonal period of strength is at its maximum from now until June.
Soybeans Seasonality
As well, the commitment of Traders report currently shows a significant short position in the positioning of speculative traders; a contrarian positive.
COT Report: Soybeans
A profitable trade is possible here and the vehicle I use is the NYSE listed etf, $DBA, the Investco-DB product. It is a structured product that reflects the price performance of ten of the major agricultural products including grains, livestock and the other "softs"; sugar, cocoa and cotton.
Technically, the DBA (below) has been is a pronounced downtrend for over a year, mostly due the tariff induced back-up of inventories in grains. The bumper crops of recent years haven't helped either, as weather patterns have been consistently favorable. That can change only one way, given today's volatile climate change dynamics.
Volume flows into the etf (top panel, below) are turning positive and the momentum (bottom panel) has bottomed, creating a classic non-confirmation pattern. In other words, a low risk entry point.
Investco-DB Agriculture Fund ETF
Even if the seasonal trade doesn't pan out, I believe that every portfolio should have some commodity exposure for long term diversification purposes. Readers of this blog will know my thoughts on copper and other industrial metals. I have been accumulating positions in the $DBB - Investco's base metal etf for since the FED went on hold.
The FED holds the key to the commodity trade. Now that they have been backed into a dovish corner by fear of a potential market upset, Powell and have effectively positioned the economy to 'run hot', while ignoring inflation risk. Real rates have compressed with the global strength in the bond market, creating a benign environment for hard assets. Commodities are a decades-low valuation, relative to pricy stocks. What part of buy low sell high don't you understand?
So if you are tired of guessing when the correction will come for stocks, chow down on some uncorrelated assets to diversify that risk. They look very appetizing to me.
RISK MODEL: 3/5 - Risk On
The elevated RSI levels that are currently generating a risk-off signal were joined this week by a sharp reduction in AAII bullish sentiment. This would seem to be a natural reaction to the over-exuberance felt widely by investors who are struggling to justify chasing the trend.
The indicator that is now at an extreme is the 3 month VIX - shown below with a 100 day rate of change indicator underneath. It has collapsed close to levels seen in the past periods of TINA and FOMO thinking. Insurance is now cheap, so maybe it will soon be time to take out a policy.
