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PowerShares DB Agriculture (DBA)

A Love/Hate Relationship Pays Off

By Chris Johnson and Jon Lewis

The great commodity buying frenzy of 2008 led to a situation that we warned investors to avoid -- the dreaded “crowded trade.”  That’s when too many investors pile in, leaving little to no buying power on the sidelines to drive prices higher. The stock price is then left to collapse as the crowd migrates out of the position.

DBA is a glaring example of the love/hate relationship that has evolved toward the agriculture sector during the last year. The fund peaked at $43 in early 2008 and was cut in half by December.

We’re taking the current “hate” toward DBA as a signal that the shares are ready to move higher from their current support level at $25.  Let’s face it, the demand for corn, sugar, wheat and soy beans (as represented by DBA) will not go away as the population continues to grow. That makes these shares a relative bargain at current prices.

For around $7, the DBA January 20 Calls (LBVAT) would leverage a move in DBA while providing some downside protection. 

Next: Knowing When the Price is Right