Though rare earth stocks could become an exciting growth area, weak chart patterns and lagging relative performance analysis indicates that now is no time to be long these shares.
Though the long-term argument suggests there may eventually be a shortage of rare earth metals, the technical action of the key stocks suggests that they are vulnerable to another sharp decline.
Molycorp (MCP), the largest rare earth stock, was hit hard on Friday after reporting its earnings after the close the prior day. Even though the net income was $48.4 million, up sharply from the net loss of $10.1 million in the same quarter last year, earnings per share missed analyst estimates by three cents.
Molycorp also reported that its new Project Phoenix is ahead of schedule, and by the end of 2012, the company should be significantly increasing their production of rare earth oxides. Some fundamental analysts who follow this sector are concerned that this will make the rare earth metals less rare, and therefore, will push down prices.
Technically, the weekly charts suggest that these stocks are likely to test, if not break, the early-October lows.
Chart Analysis: The break below strong weekly support in Molycorp (MCP) last summer (line a) triggered a wave of heavy selling that took prices quickly to the Starc- bands and support in the $29-$30 area.
Avalon Rare Metals Inc. (AVL) also reversed last week to close on the lows. The stock traded as high as $10.11 in April and has since had quite a slide. It looks as though the rally from the early-October lows is over.
NEXT: Another Sector Leader Heading Sharply Lower