Showing posts with label molycorp. Show all posts
Showing posts with label molycorp. Show all posts

Tuesday, May 17, 2011

Are Molycorp, Newmont, and Other Miners Too Risky Now?

I don't like telling people, “I told you so." But when it comes to the crash in commodity prices, especially the rare earth sector... well, I told you so.

Given the recent rumbling in commodities as a whole, this may come off as a time-machine call-out. But I can honestly say I’ve been talking about this for days. I shared my opinion with all of you on May 10 in my article Is the Rare Earth Bubble Ready to Pop?

This is a great lesson in risk management.Molycorp (MCP), the leader in the sector, had nothing less than a stunning run-over the past year, increasing more than 500%, fueled by news from China, speculation in the industry, speculation in other metals, and low margin costs. The stock just a week ago looked like it was priming for another run, possibly all the way to $100.



It’s at times like these, when the rest of the investing world gets frothy at the mouth, that the smart money starts looking for the exits. It’s a poor cliché but to paraphrase it, “the rich don’t go broke taking profits.” The first catalyst to kick off the rapid downtrend was the poor earnings report issued on the morning of May 11 and then the weakness of the overall sector and commodity market.

Yet if you were following SmartStops, then your first exit trigger occurred on May 11 at $62.45 which lead you to protecting your profits. The latest and third exit trigger in this series occurred on May 16 at $58.69.

The stock may continue downward seeking heavy support. My firm's current short-term stop is at $56.96 and the long-term stop is at $50.17.

Molycorp’s mining peers have not fared much better. If miners truly are a leading indicator of what is to come, it may be well past time to exit any short- and medium-term positions in a slew of metals.

Freeport McMoRan (FCX), Newmont Mining (NEM) and Silver Wheaton (SLW) to name a prominent few are all flagged in “above normal risk." FCX has a short-term stop at $45.66 and the long-term stop is $44.52. NEM’s short-term stop is $50.97 and long-term stop is $49.75. SLW’s short-term stop is $31.47 and the long-term stop is $30.31.

If the S&P continues yesterday's down move and breaks the 50-day moving average at 1325, the index could very well find 1300 soon after. This market is shaking out most of the speculators and will soon allow value investors who practice good risk management an opportunity to enter growth stocks at advantageous prices.

Tuesday, May 10, 2011

Is the Rare Earth Bubble Ready to Pop?

The weakening dollar has helped erase some of last week’s weakness in commodities.

Silver lost nearly 30% and gold 10% of their respective values, leading many experts to believe the commodity bubble has popped. But after a rather tumultuous week, the precious metals have started their upward trend again. Many could argue that the gold bubble has been building for nearly 10 years now and that silver’s explosive recent growth was a result of the high cost of gold and the strong industrial implications of the metal.

This leads us to ask if the bubble includes all commodities. The rare earths sector has seen incredible growth over the past year.  Molycorp (MCP), which has earnings after the close today, has gone from $15 to as high $79 all in the past year. Many investors are no doubt wary of entering such an extended and possibly overbought company, especially given the drubbing many people took with silver (SLV) in the past week. It's good to be cautious but try not to let your fear override your ability to make sound judgments. MCP has had several strong run ups over the past year and then pulled back, allowing the stock to rest before its next surge up. If you take into account the measured move, it could possibly rise another $20 in the next surge.

If you keep yourself protected, you can always take on higher-risk stocks. Now that MCP has enough history, my firm has added it. We have the short-term stop for MCP at $62.98 and the long-term stop at $57.58. Make sure to always keep your exit strategy in play even if you aren't yet ready to set proactive stops.
Editor's Note: This content was originally posted on SmartStops.net.