The Stock
First Quantum Minerals Ltd.
Recent price: $79.96
Trend
Although many major North American indexes hit 52-week highs last week, signs of a gradual weakening of the bullish stock market trend are showing. The breadth of market bullishness is mitigating, with the ratio of Stock Trends Bullish stocks (those with a 13-week average price still above their 40-week average price) to Stock Trends Bearish stocks (those with a 13-week average price below their 40-week average price) now slipping from the extraordinarily high level that had characterized the market rally for much of the past year. At the end of 2009 there were five Stock Trends Bullish stocks for every Bearish stock trading on the TSX - there are now three. This is still a bullish market sentiment reading, but the foundation for further advances is compromised.
The Canadian equity market has another chip in its bullish armour, too. A petering bull trend for mining stocks is a concern for investors who have scored significant returns in this important TSX sector over the past year. The relative 13-week price momentum of the S&P/TSX Mining Index has dropped below that of the broad S&P/TSX composite index for the first time in fourteen months. Mining stocks are now among the worst performers of the blue chip S&P/TSX 60 Index in the past three months, with Inmet Mining Corp. about to become the first of the big cap mining group to turn Stock Trends Bearish. The sector's bell may have been rung.
The Trade
A Stock Trends pick a year ago, First Quantum Minerals Ltd. rode the sector bull trend from $48 - its share price when it was profiled as a buy in this column - to a $100 stock at the beginning of this year. A correction sent the stock back to its 40-week moving average trend line in February. It rallied from there - the $70 area - to regain much of the losses by the end of the first quarter.
But now the stock has again retreated to its primary, long-term trend line. Swing trading shareholders who bought this stock on the merits of mining sector strength a year ago should be ready to exit if First Quantum's share price slides below current trend line support near last week's low of $76.50. The $70 mark - the stock's February support level - will be a key threshold for trend-following investors anxious to take profits off the table.
The Upside
Stocks profiled here on a weekly basis have intermediate-term trend characteristics that have developed over the preceding weeks and months. Although many investors will find them lagging, the trend lines used in Stock Trends' analysis - the 13-week and 40-week moving averages - are applied to categorize established price trends. Investors can learn to use these trends signals to ride price momentum along a trend line. However, too much patience at the tail end of a trend can be costly. When the trend framework of a trade begins to fracture, investors should be ready to reduce their equity risk and move on to another opportunity. First Quantum shareholders are being challenged to make this decision.
The Downside
Long-term shareholders are committed to the global growth story and will not be easily shaken out of their commodity exposure. The stock could consolidate near the present level and regain price momentum later in the quarter if sector risks diminish and legal woes hampering the company's operations in the Democratic Republic of Congo are favourably resolved.