Time to Book Profits in the Materials Sector

Includes: BHP, FCX, GLD, GS, RIO, SLV, UUP
by: Gold Digger

In my last post I talked about going long selected metal and mining stocks as prices were posing a good entry point. These stocks have had more than a 12-15% run-up since that level. So, I will take some profits off the table and will sell names like Rio Tinto (RTP), Freeport (NYSE:FCX) and BHP (NYSE:BHP).

There are multiple reasons behind changing my positions, with some of them as follows:

(1) There is a huge build up in inventories for base metals like copper and aluminum. Even though prices for base metal commodities are still rising, I see them as a market anomaly and believe that traders are not seeing the fundamental demand. I believe that metal prices will be going down soon.

(2) Another reason behind future weakness in metal prices hinges on the US dollar moving higher. The Federal Reserve seems to be moving in the right direction by raising the discount rates, so even though the market believes that actual rate hikes are still far away in the future, I think they are actually much closer. In fact, market bullishness will expedite any such rate hikes. The markets' current up move is completely in negative correlation with any expectations of a rate hike. Rates will also go up sooner because even though unemployment is high, there is only a minimal correlation in employment and the Fed Funds rates. The Fed, in my opinion, will not make the same mistakes as in the Greenspan era by keeping the rates too low for too long. This implies a strengthening of the US dollar.

(3) Even though the ECB has taken steps to limit the contagion effects from Greece, every day new details are evolving about the total mis-management of government actions in Greece. The CDS partnership between Goldman Sachs (NYSE:GS) and the Greek government that took place long before the current crisis does not bode well for Greece's future. The euro might therefore face some more headwinds relative to the US dollar. I am thus near-term bullish on the US dollar (NYSEARCA:UUP). Given these dynamics, I think a 14% increase from my entry point mentioned above is a good time to sell material stocks. These stocks might face strong resistance in making any move higher from current levels.

At this point I'll take advantage of market bullishness and convert some profits into cash and hold them in cash in the near-term, or even consider a long position in UUP.

Remember that the story for precious metals (NYSEARCA:SLV) has all along been inflation expectations (even though the market seemed to totally neglect the tame core inflation figure of 0.2% last Friday). It means that these metals are totally speculative plays right now and not ideal for investment.

Disclosure: I am selling my current positions in RTP, BHP and FCX. I might go long UUP on a dip.