Two Keys to Spotting the Next Resource Trend.
Rick Rule is a smart guy.
When it comes to resource investing there probably isn’t another person on Earth who knows more about the sector.
After listening to him speak for an hour last Tuesday it strikes us that Rick eats, sleeps and breathes resource stocks.
So you could be forgiven for thinking Rick is a resource stock spruiker.
But he’s far from that. In fact, he says 800 Aussie resource stocks are probably valueless in this current market.
That’s a worrying and encouraging figure. Why encouraging? We’ll explain now…
During a bull market it’s almost impossible not to make money.
If you’ll pardon the expression, you really have to screw up not to make money during a bull market.
The task in a bull market is to make the most of the opportunity. That means picking individual stocks to help you get a better return than if you just invested in the index.
The only real way you can do that is to invest in stocks that are outside the biggest top 50 stocks. And if you want to really do better than the average investor then you need to look at some of the smallest stocks on the market – small-cap stocks.
If you get in at the wrong time, when stocks are at the top of a bull market then small-cap stocks can fall a long way when the market turns.
This is why we always recommend you don’t invest more than you can afford to lose. After all, the market can turn at any time. It’s only with hindsight that you know for sure when the market has hit the top (or bottom).
Now, you may expect us to say that the real skill is to make money from resource stocks in a falling market.
Experience tells us that’s hard, if not close to impossible. If your aim is to make money in a falling market you’ve got two options. One is to short sell stocks, the other is to be extremely picky over which stocks to punt on.
Because even in a bear market, some resource stocks can go up. That’s usually due to news driven events, such as a new resource discovery or a resource upgrade.
But the best time to punt on resource stocks to get the biggest bang for your buck isn’t during a bull market or in the middle of a bear market, it’s when most folks have given up on resource stocks. It’s also when you can identify the beginning of a new trend.
Put those two factors together and it spells a great opportunity for speculators to get into the market before the next bull market rally begins…
It seems to have more booms and busts than every other sector combined – including technologyand biotech.
Of course, you get a general resource boom. Examples include the periods from 2003 to 2007, and 2009 to 2010. But you also get commodity-specific booms.
These happen much more frequently. Over the past six years we can think of booms in gold, silver, iron ore, rare earths, natural gas, potash and graphene. And let’s not forget the many uranium booms over the past 20 years (Rick Rule explained how he made a lot of money from the 1990?s uranium boom).
These commodity-specific booms tend to happen in waves. Speculators jump from one to the next, looking for the next opportunity to clean up.
The thing to note about these booms is that it’s not just obscure never-heard-of commodities that can boom. Who hasn’t heard of gold, silver, iron ore and natural gas?
But in recent months it seems as though investors have competely lost interest in the resource stock story. We, for one, can’t think of a single commodity-specific boom.
In fact, investors have focused so much effort on dividend stocks and other booming sectors such as technology that they’ve forgotten about the moneymaking possibilities in resource stocks.
Our bet is that attitude is about to change and the trend will turn.
As it turns out, it’s pretty much the same simple technique Rick Rule uses to spot new trends.
First, you have to find a commodity that has taken a bigger beating than any other commodity. If the commodity has high inventory levels at warehouses such as the London Metals Exchange (LME) that’s even better. It suggests there’s a glut of supply and that producers are struggling to make money in a buyers’ market.
The second thing to look for is a key trend that could drastically change the demand dynamics. That is, is something happening somewhere in industry that could cause demand to skyrocket…more than enough to soak up the existing supply glut.
This is happening across the resource industry now. But there’s one specific commodity where we see this trend taking place now, and few others appear to have caught on.
As always with small-cap resource plays there’s no guarantee the bet will pay off. But with a low commodity price, high inventory levels, and multi-year low prices for the stocks involved, this is about as good as it gets for risk-hungry investors.
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.