As I have mentioned in previous blog posts, I love to watch correlations, some of them more unusual than others. One of my favorites is watching the grain futures, such as Corn, Wheat, and Soybeans against Commodity related stocks such as Deere & Company (DE), Caterpillar (CAT), CF Industries (CF), American Geophysical Union (AGU), Joy Global (JOY), and Potash Corporation (POT).
The theory is that if grain prices surge, then farmers have more money to buy farm equipment, and fertilizers for their crops. This strategy only works at extremes as was the case the last 2 weeks.
When the last crop report came out, Corn sold off sharply. DE seems to correlate well lately with the price of corn, and that stock got slammed as well.
Here are the Corn and DE charts when the crop report came out:
The interesting thing is what happened in the next 2 weeks. Corn not only recouped its losses, but actually was at its high for the year.
As seen, on April 13th corn had recouped the loss, while DE was 3 ½ points below the day of the crop report.
Something had to give and it is all about momentum. Once Corn went high enough, not only was DE’s negative momentum halted, but positive momentum started to build. DE proceeded to “catch up ” with Corn, with the stock rallying 7 points in 3 days!
Get more trading strategies and setups from Chris Brecher at Simpler Stocks.