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| Rare earth stocks are getting a lift as demand for the metals grows |
Futures are pointing to a lower open Wednesday after a seven-day win streak for the market, the longest in seven months. The run is even more impressive considering less than two weeks ago (January 28) stocks were hit with some of the heaviest selling we have seen during the current rally. Today, the market will have to come from behind to win the day, but at this point I wouldn’t put it past ’em.
There is no significant news or data driving this slight pullback in the futures, it just seems like the tired market is taking a breather. Fed Chairman Ben Bernanke is set to speak in front of Congress today, and controversial central banker’s comments are sure to be in focus with a dearth of other data on tap. If the past is any indication, Bernanke will reiterate his pledge to prop up asset prices at every turn, which has been a green light for stock market participants to buy, buy, buy.
Light Volume
While volume has been fairly light throughout this entire rally, it has been especially paltry as the market has accelerated higher over the last few days. This is another sign that a correction could be imminent, says Marc Sperling of T3Live.com, but timing that pullback has been tricky. Buying aggressively on pullbacks, rather than timing breakouts, has been the way to go, he says. While many active traders have one eye on the exit as stock prices seem somewhat artificially inflated, it only pays to trade the price action.
Oil Taking a Rest
With the Egypt protests threatening oil supply in the Suez Canal and threatening to spill over into the rest of the oil-rich region, oil had a nice run over the last couple weeks. Combine that with blowout earnings from companies like Exxon Mobil Corp (XOM) and you had a confluence of factors pushing oil higher. Over the last few days though, as the Egypt situation has stabilized, oil stocks have taken a break or pulled back despite a roaring market.
Our favorite long-term play in the oil group, Schlumberger Limited (SLB), has actually held up extremely well while some others in the group have pulled in. The series of upper range tails shows indecision, a tug of war match between sellers looking to take profits/shorts looking to fade the strength in oil, and buyers aggressively buying any dip. Given its relative strength over the past few days, look for SLB to breakout soon.
Oil could still use another day of rest, says Sperling, but look for the next leg higher in the coming days. A chart he favors in the energy group is Devon Energy Corp (DVN), which has seen a calculated pullback into support at the previous breakout.
Gold, Silver Restoring the Luster
The identity of gold and silver has evolved over the course of the last few years. First, they were the fear trade as investors fled a faltering stock market in favor of something they could see and touch. Next, it became a debt crisis and inflation play as the US and others printed money aggressively in an attempt to mitigate the immediate effects of the economic recession. Given the degree of currency manipulation and debasement we have seen, gold bugs have touted gold as the only legitimate currency, and yesterday we got confirmation from a big player that precious metals may start to be treated as such.
JP Morgan Chase & Co. (JPM) announced they would start accepting gold as collateral for repos, strengthening the metal’s role as a more legitimate alternative currency. In response, the SPDR Gold Trust ETF (GLD) gapped up and held higher. But as has been the case for a few years now, silver continues to outperform gold. Silver, in addition to being a store of value, actually has industrial uses, so in addition to being a speculation-type play, it is a recovery play of sorts. While gold still has a ways to go, silver is knocking on the door of highs once again.
Keep an Eye on the Banks
The banking sector has lagged the market since the economic crisis began, but financial stocks are starting to wake up a bit. You have two distinct groups in the sector short term: 1) those who reported strong earnings and are near breakouts, and 2) those who disappointed with earnings are busting out of lower bases trying to get back to highs. JP Morgan Chase & Co (JPM) is our favorite in the former group, despite bad press from its relationship to the Madoff situation, and Goldman Sachs Group Inc. (GS) is our favorite in the latter group. For short-term technical traders, JPM looks very attractive for a breakout after consolidating for nearly all of 2011 so far.
Rare Earth Rotating Back In
Another quick note, watch the rare earth stocks as they have come back into play for active traders. The future is somewhat unknown for this burgeoning sector, but data shows increasing demand for rare earth materials at a time when China, which produces more than 90% of the world’s rare earth components, is cutting export quotas. After a period of decline in January, the group has turned back up.
The best stock in the sector is Molycorp, Inc. (MCP) (in fact, it is the only one with earnings at all to this point), which also recently announced a secondary offering to fund Phase 2 expansion of its California Mountain Pass mine. We stated that the announcement could mark a bottom in rare earth. Others to watch in the group for trades are Avalon Rare Earth Metals Inc. (AVL), which was the strongest yesterday up nearly 13%, China Shen Zhou Mining & Resources Inc. (SHZ), and Rare Earth Resources Ltd. (REE). Redler’s favorite set-up right now in the group is SHZ because of the tight pattern.
For more individual stock commentary, check out Redler’s daily morning Pricepoint Sheet from Scott Redler of T3Live.com.
*DISCLOSURE: Scott is long GLD, SHZ, AAPL; Short SPY. Marc is long GLD, REE, AVL, MCP, SHZ.
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