Chart of the Day

Invesco DB Agriculture Fund (DBA, NYSE)

On March 12, we added a position in the Invesco DB Agriculture Fund and featured it as a Chart of the Week, which is included below. Today, we are updating that chart.

DBA tracks the DBIQ Diversified Agriculture Index which is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities. The Index is intended to reflect the performance of the agricultural sector.

In this update, I included some of the comments made in the October 16, 2020 interview, mentioned in the March 12 edition. Grant Williams and Felix Zulauf discuss “the end game”, or the likely effects of the current epoch of increasing gov’t debt, and gov’t and central bank intervention in the financial system. In a word, Zulauf’s expectation, as is mine, is inflation.

 

Here is an excerpt from that conversation:

“So I think you should stay with large cap equities with some of the commodities.

Actually, I think commodities will probably be the least affected by the interventions because they are not really system relevant. If equities go down by 50%, it may break the system, if commodities go down 50%, that’s not the case. Therefore I think commodities are probably the safer bet if you have a firm view of where the commodity should move to. I’m quite constructive on agricultural commodities.

The commodity sector has been out of favour for virtually 10 years and I think it’s bottoming on a secular basis. Not because I think we will have dramatic demand in the next few years, but I think there are problems with supply and it’s probably an asset class that seems, from a regulatory standpoint and from a systemic standpoint, less affected than other assets and therefore capital could feel safer moving into those commodities like the food part. I like the food part a lot because I think the climate will turn cooler and not warm and that is not very good for harvest results, et cetera. The world population is still growing, but it’s not growing by much, and therefore there is a steady growth of demand for food and therefore I see higher prices. So the next five years, I think food commodities could be fantastic.”

 

I think he is correct, but more importantly, the trends in agricultural commodities support that proposition.

After investing some of our money into DBA at 17.30, the fund quickly declined to 16.60. However, by moving equally quickly back above 17.00, DBA has formed a Flag pattern, typical of a consolidation in an uptrend.

  • A flag pattern, in technical analysis, is a price chart characterized by a sharp countertrend (the flag) succeeding a previous uptrend, typically at a 45 degree angle – (the flag pole).
  • Flag patterns are accompanied by representative volume indicators as well as price action.
  • Flag patterns signify trend reversals or breakouts after a period of consolidation.

Confirming to a classic Flag pattern, volume rose into the peak, and declined into the Flag. Overnight, the Ag commodities held in DBA, like Cocoa, Corn, Coffee, Cotton, Sugar, Wheat and Soybeans were up in price, some strongly. It remains to be seen of course, but if DBA conforms to the pattern, rising volume could move it out of the Flag, toward the next target at $21.00.

 

 

 

 

 

 

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