By MoneyMorning.com.au
The market has spun on another sixpence.
It was only last week that we wrote to you pointing out the downward spiralling copper price.
No sooner had we put fingers to keyboard than the copper price took off:
It’s up 10% since late last week.
So it’s a good job there’s plenty of the stuff hanging around in stockpiles. The 60-day COMEX copper warehouse level continues to rise:
But what do we know? The market is taking on risk again. And that means commodities are up…
And why not, Bloomberg News reports on the U.S. market:
“Stocks surged, almost erasing the 2011 loss in the Standard & Poor’s 500 Index, as Europe made progress in debt-crisis talks, Caterpillar Inc.’s earnings beat forecasts and takeovers lifted health-insurance and software companies. Commodities rose on signs of Asian growth.”
When most of what you read and hear from mainstream analysis is about big resources companies investing billions of dollars in new infrastructure… well, it’s hard not to follow the crowd.
Take this from the Australian:
“BHP Billiton and ExxonMobil have unveiled a major new Bass Strait gas development that is expected to lift the construction spend on gas projects in the once-mighty oil producing region to more than $5 billion, bankrolled by the expectation of a surge in east coast gas prices.”
Five billion is a lot of cash to invest… especially when it’s “bankrolled” on a punt that commodity prices will keep going up.
Even so, investors are still getting mixed messages on the strength of demand for commodities. For instance, late last week the Sydney Morning Herald reported:
“A strong revenue boost was not enough for Woodside Petroleum to win market approval yesterday, as scepticism continued to grow about the oil and gas producer’s ambitious growth agenda.”
Woodside announced it was cutting back on the drilling program in the Pluto gas fields off the coast of Western Australia.
It’s no wonder investors don’t know which way to turn.
This morning we showed Slipstream Trader, Murray Dawes the following three-month chart of the S&P/ASX 200:
We had a simple question for him, “With conflicting news and opinions, how do you trade in a market like this?”
His answer was equally simple, “Constantly turning your trades into free options. Just keep planting seeds and keep risk to a minimum.”
By that he means when you get into profit, you should take some of your cash off the table. That way, even if the price falls back to your initial entry point you’ll still make a profit.
In our view that’s the key takeaway… when indices, individual stocks and commodities are trading up and down in a 10% range – sometimes in just a few days – it can be easy to make rash decisions.
The best way to play this market is to keep your overall exposure to a minimum. But at the same time it makes sense to “keep planting seeds” to see if you’re right. If the market does as you expected then plant a few more seeds… if it doesn’t, then get out, reassess the market and start again.
In short, we believe commodity prices are more likely to take another pasting. But not everyone agrees…
If you think commodities are heading higher, one of the best ways of leveraging your exposure to higher prices is to back small-cap resources stocks. Just beware that if commodity prices fall, leveraged small-cap resources stocks will fall too.
But with the market this volatile anything can happen. With so much interference in the markets it’s impossible to know which way the market will go on any given day.
That means between now and the end of the year, commodity stock traders and investors should have plenty of opportunities to make gains on either side of the ledger.
And whether you hold on to those gains comes down to how you manage risk – taking profits off the table, and cutting losses early. Most importantly, don’t fall for the trap of thinking you’ll miss out if you don’t invest today…
Because we’ll bet a penny that stocks will get cheaper before they get more expensive.
Cheers.
Kris.
