Most of the time, analysts make calls that are either pitifully late or laughably safe. I mean, is it really a bold call to downgrade Apple (AAPL) after it has already fallen 30%? Or, how about upping your target on Tesla Motors (TSLA) after an 80% spike? Now, I am not saying that calls like these are wrong, just that they aren't very prescient, nor are they very bold.
There are, however, a few analyst calls that are both potentially early, and anything but safe, and I think these are the calls that merit traders' attention. The latest call of this sort comes to us from JPMorgan (JPM) commodities analyst Colin Fenton, who now recommends investors overweight the commodities sector.
In a note to clients, Fenton wrote the following: "Our analysis concludes that it is in the best interests of most commodity index investors to buy immediately. For the first time in more than 2 years, we recommend an overweight allocation to commodities. In our own methodology, we define this allocation as a 5% to 7% net long exposure in an institutional portfolio, up from the 3% to 5% directionally neutral exposure we have been recommending."
Now, it's one thing to raise your exposure to a sector that's doing well, but when it comes to commodities, that sector has been virtually slaughtered.
Take the benchmark commodities index ETF, the PowerShares DB Commodity Tracking Index (DBC). This fund shadows the DBIQ Optimum Yield Diversified Commodity Index Excess Return. The index contains commodities such as light sweet crude oil, heating oil, RBOB gasoline, natural gas, Brent crude, gold, silver, aluminum, zinc, copper, corn, wheat, soybeans and sugar. Basically, DBC is a proxy for the entire commodity space, which has been hit hard of late with a rising U.S. dollar, which tends to drive the price of commodities lower.
Over the past six months, DBC has slumped about 9%, and the fund now trades below both the short-term, 50-day moving average and the long-term, 200-day moving average. The chart here shows the downtrend in the commodity ETF during the past six months, a downtrend that accelerated in late June when the Fed's "taper" talk took center stage.
In his bold, and admittedly potentially premature, call on the space, Fenton explained, "Though we may be a little early, we do not think we are very early. We would rather be premature in our pretend portfolio than you be late in your real portfolio."
This is the kind of direct writing that I think is largely missing on Wall Street, and I applaud Fenton for using this kind of language in his note to clients.
I also think JPMorgan is correct when it comes to commodities and their potential upside going forward.
The thesis here, according to Fenton, is that commodities "have fallen far enough for long enough to force involuntary cuts in production and to spur fresh demand." That demand likely means higher prices, and hence the recommendation of more commodity exposure.
For traders, the JPMorgan call could be a change in the milieu in the space. I suspect that if we continue to see the economy here at home improve, it will serve as a bullish tailwind for commodities. If that does happen, then traders who get long DBC at current levels will be happy they took the chance on this early and bold analyst call.
Recommended Trade Setup:
-- Buy DBC at the market price
-- Set initial stop-loss at $22.80, approximately 10% below the current price
-- Set initial price target at $29.14 for a potential 15% gain in six months