The sector remains strong, and the stocks of three industry leaders have all pulled back to good support, likely setting up good buying opportunities.
The sharp decline in the world markets last week took many of the major averages, as well as individual stocks, back to key support levels that correspond to last fall's highs. In an uptrend, these are the levels that should hold on a correction.
One of the few sectors that bottomed late by forming lower lows in 2010 is the S&P 500 Fertilizer and Agricultural Chemical Group. This industry has had a strong rally from the July 2009 lows, and three fertilizer stocks, Potash Corporation of Saskatchewan (POT), The Mosaic Company (MOS), and CF Industries Holdings (CF) have all pulled back to good support, which is likely setting up a buying opportunity.
Chart Analysis: The S&P 500 Fertilizer & Agricultural Chemical group closed above the weekly downtrend (line a) in early February before correcting over 15% to last week's low of 871. This corresponds nicely with the November high at 872.
Potash Corporation of Saskatchewan (POT) is the world's best-known fertilizer stock, but it's also known to be quite volatile, having peaked on February 14 at $63.96 before dropping as low as $50.25 last week.
The Mosaic Company (MOS) has the best-looking chart of the three fertilizer stocks as last week's pullback tested the good support in the $73-$74 area and the November highs, line a.
CF Industries Holdings (CF) may not be as well known as Potash or Mosaic, but it is a US-based, $9 billion fertilizer company. From the February highs at $153.80, it hit a low of $120.32 last week, which is a top-to-bottom decline of 21.7%-ouch!
What It Means: The sharp decline in many of the commodity markets has also resulted in a sharp correction in most of the fertilizer stocks. Though this group did lag for the first part of 2010, the weekly charts are still positive. I will be watching the S&P 500 Fertilizer & Agricultural Chemical index for signs that this group is becoming a leader.
How to Profit: The stock market's rally from last week's
lows has been impressive, as the McClellan Oscillator (a short-term
advance/decline indicator) has jumped from -268 last Wednesday to +40 on Monday,
which is an area of strong resistance. If stocks can continue higher today and
close with nice gains, it would suggest that we have made a rare "v -shaped
In the fertilizer stocks, I would look to buy on a setback towards last week's lows. For POT, go long at $52.80-$53.56 with a stop at $49.83 (risk of approx. 6.9%). Sell half the position at $61.22.
MOS should hold up better than POT if the market corrects. I would buy MOS at $73.20-$74.38 with a stop at $69.38 (risk of approx. 6.7%). Sell half the position at $84.77.As for CF, I would buy at $122-$123.58 with a stop at $115.88 (risk of approx. 6.9%) and sell half the position at $138.77.