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Commodities across the board have suffered mightily during the stock market’s recent correction. In the first phase of the sell-off (from late July to early August), a few commodity-related stocks triggered buys by erasing all of their “QE2-inspired” gains – these gains are measured from the end of August 2010 when Federal Reserve Chairman Ben Bernanke telegraphed the imminent implementation of another round quantitative easing. Oversold market conditions persisted longer than almost every other oversold period since 1987, producing numerous buying opportunities. I wrote several pieces describing these opportunities (for some examples, see archives under “commodities crash playbook”). After the market finally bounced, I decided to take profits in most of the recent purchases of commodity-related stocks.

The sell-off in commodities entered a second phase once the S&P 500 dove back to the bottom of its trading range by mid-September. This phase ended with the S&P 500′s break to new 52-week lows and its immediate bounce back into the previous trading range. The S&P 500 has churned through two more oversold periods in this second phase and even more commodity-related stocks have erased their QE2 gains. Some of these stocks have even plunged to 2010 lows and beyond. I have re-entered several of the previous commodities trades and added new ones in this second phase of selling. I am still biting small chunks at a time because the primary premise of the commodity crash playbook rests on a potential contraction in prices based on a drop in Chinese demand. So far, no significant drops have happened. In case this drop never occurs, I want to make sure I have taken advantage of some of today’s low prices. If the drop finally happens, I want to be ready to buy at bargain-basement prices.

In the remainder of this post, I highlight the main commodity-related purchases from the second phase of selling. I post almost all on my twitter feed using the #120trade hashtag as I execute them. For reference and background on the commodities crash playbook, see the following posts:

Preparing for Profits in a Resource-Constrained World
Profiting from Physical Assets in a Resource-Constrained World – Rules and Picks

I created all the weekly charts below using FreeStockcharts.com.

Copper: Freeport McMoran (NYSE:FCX)

FCX finally gave up its QE2 gains on its last plunge September 23. At that time the stock closed with a 10% loss, and I executed a second purchase of stock. At one point this week, copper was down 33% from its recent highs. Around the same time, FCX retested its 2010 lows before bouncing back a little. Copper’s bear market delivers a loud warning for potential recession. So it makes sense to proceed with caution when building up a portfolio of commodities. If FCX follows-through on this recession warning, the next natural support is likely around $23.

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Freeport McMoran holds support for now

Freeport McMoran holds support for now.

Potash: Mosaic (NYSE:MOS)

Mosaic is one of the few commodity stocks I MISSED when it first gave up its QE2 gains. In June, MOS approached its QE2 lows. On August 8, MOS finally gave it all up. On September 26, MOS made another round trip to these levels, and I finally made a purchase. This point was also a test of the uptrend line dating back to the 2008 lows. After a sharp rally, the stock dropped as much as 18%. In a crash scenario, I am eying the 2010 lows around $38. Note however that MOS is already relatively cheap with a trailing P/E of 8.5 (forward P/E not available at time of writing). Price-to-book is 2.0.

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Mosaic broke its uptrend in the last month and could retest 2010 lows

Mosaic broke its uptrend in the last month and could retest 2010 lows.

Country-index: iShares MSCI Australia Index Fund (NYSEARCA:EWA)

I bought and sold EWA in the first phase of the sell-off. EWA re-erased its QE2 gains on September 21, but I waited another two days before buying. This index for commodity-laden Australia is on its second strong bounce since that time. With the Reserve Bank of Australia (RBA) indicating this week that rate cuts are in the back of its mind – just in case of economic emergency – I am bracing for another swoon ... and an even better buying opportunity. Rate cuts in Australia should be very supportive of Australian economic activity and consumption given rates are already at a lofty 4.75%.

EWA has been in a bear market since mid-September. The 2010 lows stand out as the next likely support level.

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EWA has a well-established floor from 2010

EWA has a well-established floor from 2010.

Country-index: iShares MSCI Brazil Index Fund ETF (NYSEARCA:EWZ)

EWZ had a major breakdown in early August which marked the erasure of QE2 gains. It took the rest of the month to recover from this breakdown before the sell-off resumed. I continue to use the “20% sell-off” rule on EWZ to time purchases. I bought back into EWZ on September 20 thinking that the August lows should hold. Instead, EWZ went on to lose another 15% earlier this week. With commodity prices cooling down, Brazil may finally get some relief from inflation pressures and large capital inflows. I expect this pause to form the springboard for the next phase of growth going into the 2014 World Cup and then the 2016 Summer Olympics.

I got close to pulling the trigger again on EWZ as it dropped below $50 this week. EWZ is approaching important support from the summer of 2009. If another sell-off comes I will add on a successful retest of this support or a breakdown toward $42.

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The Brazil ETF has given up around 50% of its post-panic gains - a great spot to initiate small purchases

The Brazil ETF has given up around 50% of its post-panic gains - a great spot to initiate small purchases.

Rare earths: Molycorp (NYSE:MCP), Lynas Corporation Limited (OTCPK:LYSCF), Great Western Mineral (OTCQX:GWMGF), Stans Energy Corp (OTCQX:HREEF), Ucore Rare Metals, Inc (OTCQX:UURAF)
Rare earth companies occupy a special place in the commodities crash playbook. Jeremy Grantham did not include them in his long-term historical study of commodity prices. This commodity has mainly appeared on the radar of the mainstream financial press since 2010 as China moves to control its exports. I include rare earths because of their strategic and economic importance. These commodities have also generated a bull/bear battle royale given prices were screaming higher even as economic concerns continued to grow. Now, prices have come down, and rare earth stocks have essentially crashed as investors and traders fear that a speculative bubble was the only driver of prices. Molycorp in particular has been in the center of this news (for example, see “JP Morgan Reduces Upside Target On Molycorp From 100% To 25%“).

I will have more to say on rare earths in a future post (click here for an archive of Molycorp blog pieces). For now, I wanted to post charts of the rare earth stocks that I own to demonstrate the extent of the carnage in this space. I have taken advantage of this crash to load up, even on the most speculative names. I have even bought back into Lynas given the over 50% discount from prices just a few short weeks ago. I have also bought back into Great Western Mineral. Great Western is notable because the company’s CEO gave an investor update last month during which he expressed no concern about near-term prospect for rare earth prices or the company’s ability to secure additional financing. Some time-tested investors on this call practically pleaded with the CEO to dilute the stock as soon as possible to fund the company rather than give away value through offtake agreements or a joint venture. I will be watching closely to see how the CEO responds to the current change in fortunes.

For the charts below, I have adjusted time scales where the given price history prevents me from showing the trading action in a compact and easy to read form.

Click to enlarge charts

Molycorp still holds onto a substantial portion of its QE2 gains

Molycorp still holds onto a substantial portion of its QE2 gains.

Lynas has fallen as much as 69% from its all-time highs

Lynas has fallen as much as 69% from its all-time highs.

Great Western is down 50% from all-time highs but has bounced back sharply this week

Great Western is down 50% from all-time highs but has bounced back sharply this week.

Stans is still 3x higher than 2010 lows (not shown) but has shed a gut-wrenching 81% since hitting all-time highs earlier this year

Stans is still 3x higher than 2010 lows (not shown) but has shed a gut-wrenching 81% since hitting all-time highs earlier this year.

Ucore has lost as much as 69% since its all-time highs in March

Ucore has lost as much as 69% since its all-time highs in March.

Gold and silver

I have not yet made significant additions to my gold and silver holdings. I have only added a small tranche of shares in Goldcorp (NYSE:GG). If the correction in gold and silver gets much deeper, I will get more aggressive in adding to positions. Current price levels represent great starting points for anyone who has yet to begin accumulating these precious metals. (Browse my archives on gold and silver for more on my thoughts and positioning).

Hedge

Finally, I will be moving to re-establish my hedge on a crash in commodities and general economic weakness. As explained in previous posts, Caterpillar (NYSE:CAT) represents a sensitive focal point and nexus of many of the important economic trends, especially in commodities and construction. I started today (Friday, October 7) by repurchasing puts.

Keep an Eye on the Opportunities

Going forward, I will continue to scan commodities for buying opportunities. While we must respect the prospects of a recession, I think it is a time to buy with much lower risk and better prices than were available earlier this year when the stock market was racing upward to multi-year highs.

Source: A Review Of The Commodities Crash Playbook As Another Phase Of Selling Ends

Additional disclosure: I am also long Great Western Mineral (OTCQX:GWMGF), Stans Energy Corp (OTCQX:HREEF), and Ucore Rare Metals, Inc (OTCQX:UURAF).