The oil sector wasn't the only commodity-related bubble to pop in 2008. The agribusiness group suffered heavy losses, as investors jumped ship in search of greener pastures, sending the Market Vectors Agribusiness (MOO) exchange-traded fund (ETF) plunging nearly 50% last year. However, the ETF is attempting to stage a comeback in 2009, with MOO sauntering more than 10% higher on a year-to-date basis. Comparatively, the S&P 500 Index (SPX) has lost more than 3% during the same time frame. However, MOO has recently rallied back into long-term resistance in the 30-31 area - a region that has held the ETF in check since October 2008.
Options traders haven't placed much faith in MOO extending its year-to-date rally. The Schaeffer's put/call open interest ratio (SOIR), which compares call open interest against put open interest among options that are set to expire in fewer than 3 months, stands at 1.61, as puts easily outnumber calls. This reading also ranks above 97% of all those taken during the past year, as speculative investors have been more negative on the security's prospects only 3% of the time during the prior 52 weeks.
This pessimism is also seen in the short-selling community. Specifically, the number of MOO shares sold short rocketed nearly 21% higher during the most recent reporting period. Unfortunately for the ETF, a continuation of this trend could apply additional selling pressure, especially if the security is once again rejected by overhead resistance in the 30-31 area.
Digging into the sector, we find a wealth of potential bearish trading ideas. One such opportunity is Terra Industries (TRA). The company is among the leading North American producers of nitrogen fertilizers. Through its North American nitrogen plants, the firm produces ammonia, urea, urea ammonium nitrate solution, and ammonium nitrate. Terra sells its products to dealers, retailers, cooperatives, and chemical companies. It also produces methanol, which is used by industrial customers to make oxygenated fuels or as a feedstock in other chemical processes.
Following a rather impressive year-to-date rally of more than 69%, TRA's uptrend has finally stalled near the round-number 30 level. The best stock was soundly rejected by this region in late March, and is once again pulling back following a failure to overcome this technical hurdle. Providing additional resistance for TRA is the stock's declining 10-month moving average, which has descended below the 30 level.
Meanwhile, sentiment toward the shares is growing more bullish by the day, as investors look for the equity's technical strength to continue unabated. The SOIR for TRA sits at 0.78, as call open interest outnumbers put open interest. What's more, call activity on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) has been brisk. During the past 10 trading sessions, an average of 6.2 calls have been bought to open for every 1 put on TRA. This ratio of calls to puts is higher than 97% of all those taken during the past year, underscoring the growing optimism toward the security.
Short sellers, meanwhile, are jumping ship on TRA, as the number of shares sold short plunged by nearly 29% during the most recent reporting period. There is little fuel left in the tank for a continued short-covering rally, however, as the stock's short-interest ratio arrives at a paltry 1.4 days to cover. What's more, if TRA is unable to overcome technical resistance, it could embolden short sellers to jump back into the security, thus increasing selling pressure on the shares.
Finally, Wall Street remains bullish on TRA. According to the latest data from Zacks, the best stock has earned 3 "buy" ratings, 2 "holds," and no "sells." This configuration leaves ample room for fresh downgrades, which could weigh on the security.
Traders should consider an in-the-money (30-strike) put option – the June put (premium is 17% of the stock price) or September put (premium is 23% of the stock price) – to take advantage of this opportunity that is attractive from our Expectational Analysis® methodology perspective.
CF Industries Holdings (CF)
CF Industries Holdings (CF) is an interregional agricultural firm that manufactures and markets nitrogenous and phosphoric fertilizers (including diammonium phosphate, or DAP). It operates a network of manufacturing and distribution facilities, primarily in the Midwest, through which it offers products worldwide.
From a technical perspective, CF's rally of more than 42% since January appears to have finally broken down. After battling overhead resistance in the 75 area since mid-March, CF is pulling back from this region, breaking below its 10-day and 20-day moving averages in the process. These trendlines had helped usher the equity higher since January, and could now provide an additional layer of overhead resistance for the stock. There is the potential for short-term support at the round-number 70 level, so bearish investors should beware. Below 70, however, the next potential support level for CF doesn't arise until the 65 level - which is home to the stock's rising 10-week moving average.
Checking in on the sentiment side, we once again find investors enamored of the security. The SOIR for CF stands at 0.97, as calls outnumber puts among near-term options. Furthermore, the stock's ISE/CBOE 10-day call/put volume ratio of 1.69 ranks above 66% of all those taken during the past year, indicating a growing appetite for these bullishly oriented options, despite the stock's stagnating technical performance.
In addition, Wall Street analysts have yet to dole out a "sell" rating on the shares. According to the latest data from Zacks, CF has earned 1 "buy," 3 "holds," and no "sells." Any downgrades from this bunch of holdouts could spell trouble for the shares.
Bunge Limited (BG)
One final stock worth watching within the agribusiness sector is Bunge Limited (BG). The firm is a global leader in the production of soy and other oilseeds, a leading South American fertilizer maker and provider, and, through subsidiary Bunge North America, a major U.S. food processor. In addition to processing soybeans, Bunge also processes canola seeds, sunflower seeds, wheat, and corn. Its fertilizer operations take place mainly in Brazil, and involve all stages of production, from the mining of phosphate-based raw materials to the selling of blended fertilizers.
From a sentiment perspective, the shares have found few friends among investors. The bears' appetites are far from sated, as BG's 10-day ISE/CBOE put/call volume ratio of 1.45 ranks just 22 percentage points shy of an annual peak. This rising preference for bearish bets could provide additional selling pressure for the equity.
There is also room for potential downgrades, as Wall Street has been reluctant to issue "sell" ratings on the security. Currently, BG has attracted 2 "buys," 5 "holds," and no "sell" ratings. Any downgrades from these brokerage firms could result in further losses for the shares.
Technically speaking, the stock market has fallen more than 50% during the past 52 weeks. And, while BG has rebounded steadily from its October 2008 lows, the shares are now faced with double-barreled resistance in the round-number 60 region. This area has capped BG since October 2008, and is home to prior support in September 2008. Furthermore, the security was troubled by resistance at the 60 level from August 2005 through October 2006. Complicating matters further, BG's 10-month moving average has taken up residence in the region, and could provide additional pressure to the shares.
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