Rare Earth Stocks: What A Short Squeeze Looks Like

| About: Molycorp, Inc. (MCPIQ)

On Wednesday, shares of the major rare earth stocks such as Molycorp (MCP), Rare Element Resources (NYSEMKT:REE), Avalon Rare Metals (NYSEMKT:AVL), and China Shen Zhou Mining (NYSEMKT:SHZ) surged higher.

MCP ChartClick to enlargeMCP data by YCharts

News

The catalyst for Wednesday's move was news out of China regarding its rare earth policy. China defended its rare earth export quota by saying that its reserves have declined and environmental damage has occurred due to illegal mining operations. While no new formal policy changes have actually been announced, the news was good enough to ignite a short squeeze because the conditions were right.

Short Interest

Short interest in the sector in general is very high as investors are betting that the rare earth story is over. However, the high short interest is what, in part, makes a short squeeze possible.

MCP: 20 million shares or 38% of the float.

REE: 6.2 million shares or 15% of the float.

AVL: 7 million shares or 7% of the float.

SHZ: 1.2 million shares or 5.7% of the float.

Oversold

The rare earth sector in general has been hit hard recently, so the sector was due for some sort of bounce.

MCP ChartClick to enlargeMCP data by YCharts

My Take

As discussed in a previous article, MCP is my favorite pick within the group. However, because of the risks involved with the sector I would use options to play it. As for the rest of the rare earth stocks, I believe the short squeeze can continue for a short period of time but I would not hold these names for the long-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.