I was not sure if I should write this post as I am definitely no expert on resource stocks, but I felt concerned when I read what some advisers are saying about the recent correction in mining stocks. Most of them have attributed it to the Resource Super Profit Tax or RSPT announced in early May 2010, and after the correction some think that it may be a good time to buy because the market has overreacted to the RSPT and it is widely expected that the government will eventually back down on the RSPT. However, I had already noticed a bearish pattern emerging in the global commodities index well before May. Although I don’t closely follow the commodities market, I do keep an eye on the Reuters/Jefferies CRB index which is a good benchmark on the performance of commodities globally, and not just Australia. I mentioned in my Feb 16 post that the Marketclub tools had already showed a bearish monthly trade triangle, which is a long term sell signal.
A few days ago this Bloomberg article Commodities’ Biggest Drop Since Lehman Is Bear Signal also noted that the Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. I took another look at the Reuters/Jefferies CRB index and noticed that the index had peaked in Jan 2010 and we can see a very clear bearish “head and shoulder” pattern on the weekly chart as shown below. It was a similar pattern on the S&P 500 that made us decide to liquidate all our stock positions in December 2007.
The reasons given for the commodities slump was the slowdown in China and Europe, which is no big surprise. When I read that article, I felt prompted to write a blog post to alert readers who may be considering picking up some cheap mining stocks. I still procrastinated on writing this post but when I read Robert Gottliebsen’s article The new danger for our miners in today’s edition of Eureka Report, I felt I should not delay writing this post any longer. Robert looks at different data like China’s electricity consumption but his conclusions are similar to mine which is the fall in mining stocks is not just due to the RSPT but rather to a slowdown in demand for commodities globally. He is far more knowledgeable and provides a more comprehensive analysis. If you are thinking of buying mining stocks, do check out his article before you do. Eureka Report is a paid subscription but you can sign up for a free 21 day trial subscription.
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