By MICHAEL KAHNStocks of machinery makers and grain processors have stumbled, setting in motion a chain of events that could bring down more farm-related stocks.
Sector Alert
THE FLOODS PLAGUING THE Midwest and the crop-growing regions of the country are having widespread effects in the financial and commodity markets. They are also tipping the scales in the debate over ethanol and its value as an alternative energy source.
What we can deduce from the markets is that a chain of events has been set in motion that could derail leading agriculture sectors, knocking out one of the market's last remaining legs.
While corn accelerated its already steep rally last month, companies that use it as an input are naturally getting squeezed. One look at any of a dozen or so stocks classified as ethanol makers shows that trends in the sector have been down for one year if not two.
In a similar vein, the same thing is happening with oil refining companies as these stocks are also in one-year down trends as crude oil soars to record highs. We can believe analysts when they tell us margins in these businesses are thin.
The market is telling us that ethanol is in trouble because nobody is making any money producing it. And if companies stop making it, then demand for corn will drop. That, in turn, reduces the need for new farm machinery, seeds and fertilizer.
To be sure, ethanol is but a part of the overall global demand for agricultural commodities. But as stocks in the agriculture businesses falter, we still get an idea that the current trends in both commodities and stocks are not sustainable, at least not at their current paces.
For example, farm machinery maker
Agco (AG) has been in a rising trend for the past three years, just as we would expect for a stock in a global growth industry. However, since setting its high water mark of 71.95 in December, it has traded sideways in what appears to be a topping pattern (see Chart 1).
Taking a few liberties with pattern construction, we can see a trading range between 51.50 and 71.95. However, it has been two months since the stock was able to trade near the top of this range while hovering just above the range bottom. This is a technical sign of weakness and portends a breakdown is coming.
Further, the on-balance volume study shows that money has been fleeing this stock all year. By keeping a running tab of volume on days when prices rise minus volume on days when prices fall we get an idea of whether bulls or bears are more aggressive. That, in turn, tells us which way money is flowing and for Agco that direction is negative.
If prices do drop below the trading range, they will also drop below a trendline drawn from the start of the rally in 2005. The combination is rather bearish. And the chart for peer Deere (DE) looks very similar so a potential reversal of fortune is not just company specific.
Indeed. Another peer, irrigations systems maker
Lindsay Manufacturing (LNN) reported lower than expected earnings June 19 and dropped 17%. It is now on the verge of confirming a massive "double top" pattern with a move below support at roughly 94.50 (see Chart 2).
Last week, Getting Technical looked at the market's leaders and concluded that fertilizer stocks were among a few groups that were still in decent shape despite huge run-ups (see Getting Technical, "A Survey of Momentum Plays," June 16). So far, fertilizer stocks are still in rising trends.
But if we look at food producers such as Archer Daniels Midland (ADM) we can see that the good times ended last month (see Chart 3).
The tumble has taken the stock to the bottom of a two-year range and technically that is a support level. But the point is that the bull market here has ended no matter what the world's demand for food products may be.
And even peer Bunge (BG) was already in a volatile up and down pattern rather than a rising trend before announcing its takeover bid for Corn Products (CPO) today.
So, if producers of agricultural commodities have stumbled and some of their suppliers have stumbled, can the other suppliers be far behind? It is just a thought and I certainly will not fight the rising trends wherever they exist but the mantra of continually rising food prices that is currently in vogue may have a sizable flaw.
Also read Getting Technical, The Market's Mood
This Wednesday in Barron's Online.
Getting Technical Mailbag: Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
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