8:45am (EST)
We learned again yesterday the market is still fragile to headline news, both good and bad.
The bulls were once again pushing new highs and testing resistance after good employment numbers but things abruptly went south after another earthquake struck Japan. There was a rush for the exits as the Dow quickly dropped triple-digits before recovering most of its losses after a tsunami warning was lifted.
We were glad to see the quake wasn’t as severe as it had been reported and Japan’s nuclear facilities didn’t suffer a setback. The news did cause oil to spike as it closed above $110 a barrel. It remains to be seen how much higher gas prices are going to hurt the consumer but judging by the retail numbers from Thursday, they aren’t too concerned right now. Oil is at its highest levels in 2 years and is up 20% for the year.
Although the market got a nice bounce off the lows, we knew trading would be choppy for the remainder of the session. Still, it was good to see the bulls hold support.
The Dow fell 17 points and settled at 12,409. The index reached a high of 12,440 while the low was 12,328.
The S&P slipped 2 points to finish at 1,333. The index traded down to 1,326 after kissing 1,338 at the open.
The Nasdaq declined 4 points and closed at 2,796. Tech made a charge up to 2,813 then touched a low of 2,781 before making a push back towards 2,800.
We will cover support and resistance in our afternoon update but we were hoping for a little more momentum this week. The bulls are still up but we should have penciled in a flat week with the start of earnings coming up.
A lot of traders didn’t want to commit new money to the market this week because the real action will likely unfold over the next three weeks. We have been trading small and have been able to close 3 trades this week for gains. We also have a few trades that will expire next week as the April contracts wind down so we will have plenty of room for some NEW trades. However, we may still trade light until we get a clear trend.
Our current Watch List is loaded with bullish trades we are following but we have also added a couple of bearish trades in case the bulls fail to break resistance. We wouldn’t mind a market pullback or correction because the long-term trend is still bullish and it would allow us to get better prices on some of the options we are following. Either way, we expect volatility to pick up next week.
We also wanted to give you a sneak peak of our Weekly Wrap and the article we ran last Sunday. (Quotes are from Friday’s 4/8/11 close):
Rare Element Resources (REE) – A Highly Volatile Play
After having quadrupled in value in the last 52-weeks on news that China would cut rare earth export quotas, is Rare Element Resources (REE, $13.02, down $0.15) still a good value? The technical picture is giving mixed signals, but fundamentals are strong.
Rare earths are actually not that rare. Cerium is the 25th most abundant element in the earth’s crust. While more abundant than many other earth minerals, they are not concentrated enough to make them easily exploitable economically. The table below lists the 17 rare earths and some of their uses.
|
Sc |
Scandium |
Aircraft parts |
|
Y |
Yttrium |
Lasers, High-temperature superconductor |
|
La |
Lanthium |
Battery electrodes, Camera lens |
|
Ce |
Cerium |
Oxidizing agent, Catalyst for oil refineries |
|
Pr |
Praseodymium |
Magnets, Lasers |
|
Nd |
Neodymium |
Magnets, Lasers, Violet colors in ceramics |
|
Pm |
Promethium |
Nuclear batteries |
|
Sm |
Samarium |
Magnets, Lasers, Neutron capture |
|
Eu |
Europium |
Lasers, Mercury-vapor lamp |
|
Gd |
Gadolinium |
Magnets, Lasers, X-ray tubes, Computer memories |
|
Tb |
Terbium |
Lasers, Fluorescent lamps |
|
Dy |
Dysprosium |
Magnets, Lasers |
|
Ho |
Holmium |
Lasers |
|
Er |
Erbium |
Lasers, Vanadium steel |
|
Tm |
Thulium |
Portable X-ray machines |
|
Yb |
Ytterbium |
Infrared lasers, Chemical reducing agents |
|
Lu |
Lutetium |
PET scan detectors |
As one can see, many of the rare earths are used in high-performance magnets and lasers. They are also a key component in military lasers, radar, missiles, guided bombs, aircraft electronics, night-vision goggles, and defense systems. Additionally, rare earths are used in TV displays, cell phones, hybrid electric motors, and wind turbines. Computer hard drives use magnets made from rare earths. Each wind turbine requires a huge magnet, consuming about a ton of rare earths. And rare earths are crucial to hybrid cars. As the United States moves to more green power such as wind, rare earths will become more and more in demand.
The recent earthquake in Japan may help rare earth demand more than it hurts it. The nuclear spill may cause more nations to favor green energy over nuclear energy. The opposite side is that Japan is the largest importer of rare earths in the world, consuming almost 50% of the total output.
China has about 30% of world’s deposits but, mainly due to lax environmental standards, currently produces more than 96% of the global supply. However, as China tightens its environmental controls and its robust economy continues to consume rare earths, it is predicted that by 2015 the country will become a net importer, thus further pressuring prices.
The country has been hiking export quotas, limiting world supply. And as of April 1, China imposed a heavier tax on the minerals. According to the Chinese state-owned media, Xinhau, the tax has been set at 60 yuan ($9.14) per ton of light rare earth minerals, and 30 yuan ($4.57) per ton of medium and heavy rare earth minerals. Light rare earths are La-Sm, and heavy rare earths are Eu-Lu.
Reuters reported last week that the Chinese raised the price for rare earth metals past the $100,000-per-ton mark — the first time ever that the price per ton has vaulted into the six-figure range. According to the report, that’s an almost nine-fold increase from a year ago, and recent prices are up an astonishing $34,000 per ton in the last month alone.
This is a lot, especially if Canada’s Rare Element Resources has the 17.5 million tons of rare earths it claims. The company owns 100% of the Bear Lodge deposit in Wyoming, which holds mainly light rare earth elements. Many U.S. deposits lack the heavy rare earth elements critical for much of today’s technological innovations, but regardless of the type of rare earth, it is crucial for the country’s security to develop a strategic stockpile. China has been doing the same. Recycling of rare earths is costly and only yields small quantities. At current prices, it is uneconomical, but will become more in favor as prices go higher.
Rare Element Resources, along with California-based Molycorp (MCP, $59.25, down $0.77), are one way the government can achieve such a strategic stockpile. Based on the high ore grades from REE’s drill holes, the company expects to be able to produce rare earths at low costs when it starts mining in 2015. However, Molycorp’s mines are expected to become operational in 2012, beating REE by three years. So no doubt, there will be competition.
But there is a bonus package with Rare Element Resources as it produces more than just rare earths. It also produces a small amount of gold. From a recent study, they estimated that the Sundance gold project has 947,000 ounces of gold. At gold’s current price of over $1,400 an ounce, that is a total reserve of over $1.3 billion, far higher than the company’s current market cap of $562 million. And this is just one mine.
From the charts below, three out of the four indicators (MFI, stochastic %K and %D, and the W%R) are in or nearing overbought signals, a bearish sign. However, the vertical purple line shows the last time when all the technical’s were at similar levels, as circled in purple, the stock started an upward climb. The orange line represents the decline after a breakout. However, only the stochastic %K and %D and the W%R were at the same level as they are now. Both the MFI and RSI were above their current levels, as circled in orange.
The current stock price seems to be stuck in the $12-$13 trading range. Support is at $9.50, and long-term resistance is at $18. Shares have bounced off support since mid-March on strong call option volume and are at near-term resistance ($14-$15).
On March 22, there was heavy volume in the REE April 12.50 calls (REE110416C00012500, $1.05, down $0.05) which easily doubled as traders took advantage of a 25% jump from $10.38 to $12.88, the day before.
Will the stock go higher from here? From the above analysis, it could reach $18, which is the resistance line as shown in the chart. But how long will it take to get there? It could zoom up very fast, seeing that it zoomed from $10 to $18 in early January in 15 days. But to take a conservative rate of increase, we will use a rise of $0.13 a day. Starting from a current price of $13.02, it will take 38 days to reach $18.
Based on Friday’s market activity, the April 14 calls (REE110416C00014000, $0.40, down $0.05) were the most popular and could be worth a gamble. However, the May 15 calls (REE110521C00015000, $0.60, down $0.10) might be the better play for those of you wanting to speculate.
The Rare Earth ETF (REMX, $26.61, up $0.31) is another way to play a higher move in the sector. Although volume is light, the May 28 calls (REMX110521C00028000, $0.85, up $0.05) might also be worth a look.
(END)
As you can see, Rare Element Resources (REE, $15.30, up $2.16) had a big day yesterday. The April 14 calls (REE110416C00014000, $1.45, up $1.25) we profiled zoomed 625% and could have been picked up for less than a quarter on Thursday’s open.
The May 15 calls (REE110521C00015000, $1.65, up $1.05) soared 175% after opening at 75 cents yesterday.
For those of you who haven’t jumped on board our Weekly Wrap, we will be offering a special deal today so stay tuned…
As we head to press, futures are showing a strong open: Dow (+47), S&P 500 (+7), and Nasdaq 100 (+8).
Subscribers, check the Members Area for the updates.
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