After opening higher this morning, the market has been quiet, drifting higher early before pulling off slightly. The market seems to be resting and showing indecision after volatile trading last week. The heavy selling we saw early last week definitely stirred the pot and reminded complacent investors what fear feels like, but in the end the resilient market proved itself once again. Today, active traders are treading lightly, trying to identify pockets of strength while waiting for the market to tip its hand on the next move of this sequence.
On the Fertilizers
A big focus over the last week, which we have been beating like a dead horse in our articles, has been the agricultural group. The long and short of it is: we believe in the agricultural sector. With the world population growing in size and affluence, the amount of farming is going need to increase substantially. At the same time, the amount of arable (i.e. you can grow crops on it) land in the world is decreasing, thus the only way to farm more is to use potash fertlizers to improve soil quality.
PotashCorp./Saskatchewan (POT) produces about 20% of the world’s potash supply, which is one component of why it is our favorite stock in the ag sector. The company scoffed at a low-call offer from BHP Billiton last year, believing that the company and stock have significant upside. Other potash and phosphate producers we like are The Mosaic Company (MOS), CF Industries Holdings, Inc. (CF) and Agrium, Inc. (AGU).
Last week we saw a great deal of profit taking, and the ags were some of the worst-performing stocks in an overwhelmingly bearish tape. But given our long-term belief in the fertilizer stocks, we looked for a calculated area to buy the dip like we did back when Cargill announced intentions to unload its majority stake in MOS. When POT traded down through its 50-day moving average and then came back above, we targeted as a long, also knowing that a stock split was on the horizon.
Today, with another gap up, POT has almost taken back all of those losses from last week. We believe this trade perfectly embodies our philosophy in the markets: have a fundamental framework and use technical tools to buy dips in those fundamentally strong sectors and stocks. When the market gives short term signals that a correction is imminent, trim share size, hedge positions and reduce risk.
High Ho Silver
Silver was another big market headline last week as it continued to stretch out to new highs. The price of silver is being both by speculation (silver as a store of value in an inflationary environment) and industrial usage, which is where it separates itself from gold. Silver demonstrated its strength, and forecast higher prices, when it took back all of Thursday’s massive losses by the close of the subsequent session Friday. Today, silver is following through after that reversal, making new highs once again.
Another silver play to consider, as you can do with gold, is the silver miners. Silver Wheaton Corporation (SLW) is our favorite in the group right now after opening higher out of a four day consolidation this morning. The stock still has some room to the highs and should breakout after that.
*DISCLOSURE: John Darsie is long SLV, SLW, POT calls, MOS. Scott Redler is long GLD; Short SPY.
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