Beware of a Dead Cat Bounce in Fertilizer Stocks

By Commodity HQ  AUG 14, 2013 10:15 AM

Here are three commodity stocks that may offer attractive short selling opportunity in our uncertain market.

 


Stocks have recovered from the "taper" scare and the bulls are back in the driver’s seat, although sluggish growth in Japan coupled with worse-than-expected retail sales at home may bring out the bears before this trading week is over. Major equity indexes continue to grind sideways as investors remain hesitant to push strongly in either direction; looming seat changes on the board of the Federal Reserve coupled with Congress re-opening the budget debate in September have given some investors plenty of reasons to avoid jumping in long amid the ongoing euphoria.

As such, below we highlight three commodity stocks that may offer an attractive short selling opportunity for those looking to bet against some of the stellar run-ups already seen across Wall Street. The theme this week is fertilizer stocks in light of the recent sell-off, as a result of the potash cartel breakup seen on July 30. The world of fertilizer stocks took a major tumble after it became apparent that potash prices would no longer have a floor, which inevitably prompted many to entirely pull out of this sector as the biggest players could see their operating margins deteriorate significantly over the coming months.

The fundamental challenges facing the stocks outlined below could prove to be detrimental to their long-term fundamentals, which is why we advise anyone entering into a long position to be careful of getting trapped in a "dead cat bounce." This is a phenomenon when a security rebounds partially after a major pullback, only to resume its downtrend in the weeks following.

The stocks included here are deemed to be great trading candidates for three reasons; first and foremost, each of these companies boasts a market cap upwards of $10 billion along with average daily trading volumes topping the $1 million mark, in an effort to weed out smaller, more volatile, trading prospects.

Second, these securities are trading below their 200-day moving averages, thereby implying that they are in longer-term downtrends. Lastly, these stocks are also trading above their five-day moving averages, which makes them attractive for swing traders looking to sell short before they resume their downtrend. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques:

Potash Corp (NYSE:POT)

Consider POT’s one-year daily performance chart below.


Click to enlarge

POT has rebounded over the last two weeks, but shares still remain below the high seen on July 30, the day of the sell-off. Anyone looking to bet on a continued rebound here should set a tight stop-loss around $30 per share because another round of selling will likely welcome fresh lows for the stock.

Monsanto Company (NYSE:MON)

Consider MON’s one-year daily performance chart below.


Click to enlarge

This is the strongest stock of the three, but the fact that it is trading below its 200-day moving average is worrisome; furthermore, notice how MON has been posting lower-highs and lower-lows since peaking in mid-May of this year. Given Monsanto’s focus on seeds and herbicides, the recent potash-induced pullback may be an opportunity to go long for those with a bullish outlook on the agricultural sector.

Mosaic Co. (NYSE:MOS)

Consider MOS’s one-year daily performance chart below.


Click to enlarge

MOS is outpacing POT at the moment, seeing as how this stock has peered above the highs seen on July 31. Despite this encouraging rebound, the company’s long-term fundamentals could suffer more if developments overseas lead to even lower potash prices. Similar to POT, anyone looking to jump in long should utilize a tight stop-loss here around $40 per share.

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Editor's note: This article by Stoyan Bojinov was originally published on Commodity HQ.
No positions in stocks mentioned.