The theory that drives cereal makers’ (and other grain-intensive) stocks higher and lower isn’t a complicated one. If wheat and corn prices fall, that makes input prices cheap for these companies. If commodity prices rise, it’s tougher for cereal-makers to make a buck.
Care to guess what was happening when Kellogg (K) began what would ultimately be a 40% rally back in August of last year? Wheat prices were plunging, from a peak of $9.44 per bushel then to a low of around $6.80 by April of this year. Point being, the big rally from the stock made sense.
There was something very different with this rally, however, than we’d seen with prior rallies spurred by falling commodity prices. This one was far more exaggerated than any of the prior ones. Ergo, the potential pullback could be equally large. Worse, the fact that wheat prices have stopped falling at a known support line suggests now might be the time for things to unravel.