By MoneyMorning.com.au
Small-cap mining stocks have had a great year so far.
The Emerging Companies Index (XEC), which is a good proxy for small-cap miners, has gained 6.5% in the last three weeks. Meanwhile the ASX200 has gone nowhere in this time.
The XEC index has rallied for six weeks straight now. Before this rally began, I didn’t sleep well for the few nights after calling my December newsletter ‘The buying opportunity everyone else will miss’. At the time, the markets were on their knees, and most self-respecting newsletters were flying their crash-flags high and clear.
But I saw an opportunity and stuck to my guns. The December issue went out on the 20th of December. Since then the XEC index has risen 15% in a straight line to a six-month high.
That doesn’t mean it’s all happy days ahead.
In fact, it’s normally when you start high-fiving like this that the market slaps you in the face, and kicks you in the guts. A trading mate told me that next to his trading screen he has a mirror, and next to that a photo of himself punching the air in victory. Above it, it says ‘Does this guy in the mirror look like this guy? If so, then it’s probably time to sell your positions and take the dog for a walk’.
But I think this rally has further to run. This is the steadiest and longest rally we have seen in over a year, and it’s no coincidence that it started as the European Central Bank (ECB) deployed its own version of quantitative easing, Long Term Refinancing Option (LTRO) in December.
Particularly now the Fed has announced it will keep interest rates close to zero for three more years, and started talking up QE3. Both moves force investors into riskier parts of the market than they would prefer. This diverts more funds into small-cap mining stocks. From such depressed levels, the small caps responded to money flows rapidly, rising in price before the rest of the market and continue to lead the way.
China’s at it too. The people’s bank has been loosening monetary policy, and creating fund mandates designed to force money into the stock market. This has caused a turnaround in the Chinese stock market, taking commodity prices with it.
With the Federal Reserve, the European Central Bank (ECB), and the People’s Bank of China all stimulating the market, this could be the start of a significant risk-on, liquidity-driven rally. Their policies will ultimately fail to fix any fundamental problems, but it doesn’t mean investors can’t profit along the way. As they say: make hay while the sun shines.
But be warned. With the usual amount of unknown risks out there regardless, no one really knows what will happen next.
Maybe Israel’s covert conflict with Iran becomes a real war, and the market collapses. Who knows? If you are risk averse, this current rally is at the very least an opportunity to take a bit of profit on any winners to reduce your overall risk level or a chance to trim your losses on any losers.
Dr. Alex Cowie
Editor, Diggers & Drillers
Publisher’s Note: Dr. Alex Cowie will be appearing at After America: the Port Phillip Publishing Investment Symposium, March 14th-16th at Sydney’s Intercontinental Hotel.
From the Archives…
Picking the Big Investment Story for 2012
2012-02-10 – Kris Sayce
Attention: If You Have Australian Bank Stocks – Sell Them Now
2012-02-09 – Kris Sayce
Why This Bearish Indicator Means it’s Time to BUY Stocks
2012-02-08 – Kris Sayce
Why The RBA Uses The Terms of Trade Indicator… And Why You Should Too
2012-02-07 – Greg Canavan
Why the US Unemployment Rate is a Slippery Statistic
2012-02-06 – Dr. Alex Cowie