Great traders and true value investors know that it’s not only the return function that dictat...
The Dog Days of December
12/18/2009 4:45 pm EST
There’s nothing like a market where volume is drying up, as it usually does at the end of the year, to help traders move stocks on news and rumors. Especially when the world is so busy supplying lots of potentially market-moving headlines.
It’s a potent combination—enough to send stocks on rollercoaster rides and investors curling into fetal balls. No wonder the top question I’m getting right now is, “What’s the matter with ….?” (You fill in the blank.)
Much of the time, the answer is, “Not much.”
The downgrade of Greek debt and the rising odds that the Federal Reserve will raise rates by the middle of 2010 (whether or not those odds are correct is another matter) have spurred a move to safety that has pushed the US dollar higher.
That’s knocked the stuffing out of commodities and precious metals (and the stocks of commodities and precious metals companies) and emerging economy stock markets. These assets were ripe for some profit taking, since they’ve outperformed this year, so investors were nervous to begin with. With volumes down and the news flow adding to fear, prices in these sectors tumbled this week.
Does this reflect any change in the long-term fundamentals of economies such as Brazil, China, or Indonesia? Or of commodity companies such as Thompson Creek Metals (NYSE: TC) or Yara International (OTC: YARIY)? Nah.
The growth stories—and the down side of political risk, underdeveloped financial sectors, and lack of financial transparency or volatile end markets and big currency exposure—are exactly what they were a month ago.
That’s why I’ve been writing so much recently about using this downturn to look for bargains in these long-term stories.
In the days from just before Christmas until New Year’s, trading volume dries up on US stock exchanges. That leaves the floor to traders who try to exploit the lower volumes by moving stocks.
That effort is easier when investor sentiment is pre-primed one way or the other— as it is now to the down side—and when the news flow provides lots of fodder for the rumor machine.
Look at today’s headlines, for example. From Copenhagen, where the global climate conference isn’t exactly going smoothly, the headline on Bloomberg this morning was “China Snubs Obama.” In the Middle East, there were reports of possible incursions by Iran along its border with Iraq and the seizure of an oil well. And finally, the European Central Bank chimed in with a report that European banks may need to write down 13% more loans—a piddling $268 billion—than was projected earlier.
None of this means you should ignore movements in individual stocks—or the lack thereof.
For example, shares of Potash of Saskatchewan (NYSE: POT) are getting hammered Friday on news that a competitor Agrium (NYSE: AGU) has “made progress” on opening a brown-field potash mine, and on news that Brazil’s Vale (NYSE: VALE) is about to get into the potash business by opening a green-field mine. All that would add to global potash supply—some time down the road.
If you’re looking for a reason to take profits in Potash, this is enough, I’d guess. If you have a slightly longer view—and a sunny personality, like I do—you might see the moves by Agrium and Vale as signs that they believe that the current potash pricing logjam as everyone waits for China to start buying again will be well over by the time these projects come on line.
But if you want to move the stock in the short term, all the momentum is to the down side and pushing in that direction is a pretty easy way to make a trading profit.
Would I like to have sold Potash at $122 and re-bought today at $106? Sure. Am I ready to stampede out of the stock on signals from what is the most unreliable time of the year for asset pricing? No way.
The one price signal I would take seriously in this market, however, is a stock that holds up or goes higher when the news and sentiment are against it. Vale, for example, has been holding its own—down only a bit on down days and up on a day like today—even as the commodities sector and the Brazilian stock market have been under pressure. For more on Brazil and Vale, see this recent post.)
I think rising spot iron ore prices, which strongly argue that iron ore prices will go up by as much as 30% in next spring’s annual negotiations, are behind the stock’s resilience. Iron ore prices had been projected to stay unchanged or go up by just 10% next year. So, that’s big good news for Vale and other iron miners.
If you want to pay attention to stock prices over the next two weeks, you should look at situations like that—where a stock is holding up against the tide.
For the rest, it’s never time to go to sleep on the markets, but I’d certainly take end-of-the-year moves, especially this year, with a grain of frankincense ($7.98 for four ounces from Amazon.com).
Full disclosure: I own or control shares of Potash of Saskatchewan, Thompson Creek Metals, and Yara International in my personal portfolio.
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