The commodity arena let up during yesterday's trading session after Bernanke confirmed what we all already knew. The Fed will initiate QE3, and the easing shall devalue the US dollar and push up the prices of commodities. We saw fresh six-month highs almost across the board on our screen for various commodities we follow and even saw some beaten down sectors moving, and moving strongly at that. We have been bullish of precious metals and oil, and might recommend investors take some profits on the precious metals trade going into the weekend and then use that capital to either re-enter after the pullback (possibly around the $1700/ounce range) or diversify within the commodity space, either play works for us.
Oil & Natural Gas
Halcon Resources (HK) saw shares fall another $0.43 (5.67%) to close at $7.15/share on volume of 35.3 million shares. The buying opportunity we mentioned yesterday is this area as we are just $0.15 higher than where the secondary was priced. As we said yesterday when you can buy into a company with a good management team, good properties and within a good industry - you have hit the investing trifecta. As a side note, shares usually trade lower down to the area where the secondary takes place as there are many games which can be played here. We see it in other countries a lot, and what happens is that someone gets in on the secondary at the $7/share price and then looks at the current market price at say $7.50 and decides to pocket the difference by going short shares quickly before they take delivery of their recently purchased shares. It seems this happens in Canada a lot, especially when lock-up periods are involved. Just something to be aware of as we do invest in companies which do secondaries and may write about them in the future.
Magnum Hunter Resources (MHR) was another strong E&P play yesterday rising $0.35 (7.68%) to close at $4.94/share on volume of 7.8 million shares. The news here was that Credit Suisse initiated coverage on the company with an outperform rating, which is a big pick-up for the company as this will give them exposure to institutional and well to do individuals that they otherwise might not have had. We continue to do our due diligence on this name, but lately we have found names we like a bit better in the industry and this name keeps getting moved down the list. That is not to say we do not like the story here, just that we like the stories a little bit better elsewhere at this time. We will keep readers updated regarding the shares moving forward.
Freeport-McMoRan (FCX) rose $1.69 (4.21%) yesterday to close at $41.79/share. Volume was strong at 28.8 million shares and the shares broke through and closed above the $41/share level. Our trade worked out; however, we would continue with a trailing stop, as we see no need to risk our short-term gains especially when news out of Asia or Africa could derail the rally. It is the conservative move, but the correct move here. We will not recommend a stop area, just that readers who initiated the trade continue to use one. With the Fed behind the markets and performing further easing, we should see gold and copper move higher and we all know what that means for Freeport. We would watch the price action as shares approach the $45/share area and think that is where action will next be needed - if we head higher.
We are getting closer to moving bullish on the sector as a whole as the charts are looking much better here, and in some cases, it appears that certain individual companies are breaking out. We are conflicted here as this is not company-specific or even industry-specific news, but rather market driven based on quantitative easing, which throws most of our research and analysis out the window. It is one of those moments when one must look at the fork in the road and make a decision, and at this point, it is frustrating as QE3 has thrown our timeline out of whack. Remember, we wanted to be invested in the Utica and rotate into the coal sector with profits from there closer to year end. Alpha Natural Resources (ANR) and Arch Coal (ACI) were two of the bigger winners in the sector yesterday. Alpha saw huge volume of 41.6 million shares traded as investors pushed the price higher by $0.89 (12.13%) to $8.23/share. Arch was not far behind with 23.9 million shares traded with shares closing at $7.39/share after having risen $0.68 (10.13%) in yesterday's session. These two will be in the second wave we recommend as we will be involved with the blue chips first and work our way up the risk ladder. This will all be something to think about over the weekend.