Four ETFs Running on Fumes: DBA, USO, TLT, UYG

Our Trading Reports in this Article:

• DBA
• USO
• TLT
• UYG

As a trader rides the climb of an ETF an important question to consider is when to cash out. Taking profits too early will leave money on the table, but checking out of a play too late can lead a trader back down to the depths of where the journey began. Here are four ETFs that have experienced impressive runs, but may have run their course.

Drought Trades

The U.S. is experiencing its worst drought in 56 years which has caused the price of corn to hit record highs as it has spiked more than 50% since the start of June. The rise has been welcomed by shareholders of the PowerShares DB Agriculture Fund (NYSE: DBA). The fund is up 11.7% over the past three months versus 1.6% from the S&P 500.

It is probably time for traders to consider some profit taking on this trade. We saw a run like this in 2008 before corn came back down to earth. The parabolic path on which this commodity has moved is not sustainable over the long run. Recent rain in the Midwest has eased some of the worry over persistent crop damage. Although corn only makes up a portion of DBA, it will be enough to tame the recent rally.

Another drought trade that has worked is the United States Gasoline Fund (NYSE: UGA). This ETF which tracks the price movements of gasoline has jumped 11.6% in the past month. The fund is now likely running out of room to run in the short term. Given that higher ethanol prices resulting from the drought have been a significant factor in this move, I think this ETF may soon be taking a breather for some of the same reasons as DBA.

Financial Fitness

Over the past three months the iShares Barclays 20+ Year Treasury Bond Fund (NYSE: TLT) has appreciated by 7.8%. Over the past year the ETF has risen 24.5%. Long term Treasuries of the U.S. may be a safer investment than the debt of other countries, but the flight to safety is overcooked at this point.

This play is running out of legs. Should the U.S. economy begin to pick up steam in the not too distant future, some of the money stashed here will make its way back to equities. The federal government continues to struggle with deficit spending which will additionally pose long term threats to TLT.

One other ETF that traders may want to consider taking profits on is the ProShares Ultra Financials Fund (NYSE: UYG). The fund is up 28.1% year-to-date, but the 50-day moving average has begun to come back towards the 200-day moving average. The ongoing financial crisis in the E.U. should continue to weigh on the U.S. banking sector and make it difficult for a prolonged breakout from UYG to occur.

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