Can Mining Stocks Maintain Their Stellar Start to 2017?

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Base metal miners are on a roll, and with BHP Billiton reporting overnight on Tuesday, Antofagasta yesterday and Anglo American today let’s review the sector to see if this rally has legs!

Before I go on let’s set the scene. Firstly, 2016 was a great year for the peer group with base metal miners benefitting from recovering commodity prices and effective cost cutting and debt management strategies. A theme we found very profitable.

2017 has started in the same vain. The FTSE 350 Mining Sector Index is up just shy of 14% – that’s double the next best performing FTSE 350 sector.

‘Trumpflation’ A Bullish Backdrop

Having seen the sector outperform notably so far this year it comes as no surprise that the trading updates this week far from revealed any ‘smoking guns’.

Production estimates were little changed and chatter that we are now past the commodity cycle lows continues to grow.

Throw in the backdrop of ‘Trumpflation’ and dollar strength firmly in the cross-hairs of the new US administration and many are asking is this a buying opportunity?

Buy the Rumour, Sell the Fact?

Sure, a well-established uptrend is in play for the peer group but we are not jumping on board. Or at least, not just yet. See BHP Billiton’s 9-month daily candle chart below to help me expand on this point.

Yes, the uptrend is there for all to see and prices gapping higher from a period of consolidation on Tuesday is a sign of bullish momentum.

However, yesterday’s candle catches our eye. After gapping higher at the open and rallying to new trend highs, prices fell steadily throughout the day to form a sizeable bearish engulfing pattern. In our view, a clear sign of buying exhaustion.

In truth we are seeing similar signs across the peer group. As I write Anglo American is trading more than 3 times its 14-day average true range (ATR) away from its moving average. See below Anglo American’s 9-month daily candle chart.

As the above chart shows, after prices gapped higher yesterday on the release of earnings the shares then traded lower intraday and formed an indecisive doji candlestick. Yet another sign of buying exhaustion from a base metal miner.

So yes, we continue to watch base metal miners for potential entry points in this stellar uptrend. But no, we don’t see that time as now.

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