The Stock: Lundin Mining Corp.
Recent price: $4.35
Trend: Another heightened moment of investor anxiety hit the market last week and the biggest losers were mining stocks. The 9 per cent drop in the S&P/TSX Mining Index - a victim of a downward draft that chilled resource stocks in general - again exposes the frail economic foundation of the stock market's bullish trajectory. It also reminds investors of the monetary underpinnings of the commodity play as every pulse of life from the bearish U.S. dollar -- the U.S. Dollar Index had a rare 1 per cent tick upward last week -- rattles metal mining stocks as much as gold stocks, the traditional inflation barometer.
The greenback's downward trend has global investors turning to hard assets as they lose faith in the dollar's prospects, so last week's tripping of mining stocks could be another opportunity for investors - those that see no immediate end to the greenback's fall - to top up their exposure in the sector.
The Trade: A few big mining stocks took double-digit percentage drops last week, including InMet Mining , Ivanhoe Mines , and Thompson Creek Metals .
Lundin Mining Corp.'s stock showed more resilience, though, and finished the week down only 4 per cent after hitting a new 52-week high on Monday. LUN has been Stock Trends Bullish since the second quarter and has handily outperformed the broad market since. But like many other stocks in the sector, its response to movements of the U.S. dollar deserve some trading attention.
A month ago the greenback also showed a faint bit of recovery, challenging commodity stocks. The scenario that played out then could repeat itself.
At the beginning of October Lundin's shares had dipped with the sector, turning Stock Trends Weak Bullish as they moved below the 13-week moving average trend line to a low of $3.25 on October 2. However, when the U.S. dollar resumed its downward drift the following week LUN promptly moved back to its trend line level above $3.70.
Trend in place, the share price has since established itself above the $4 resistance level that held it back in the late summer months. Investors unmoved by temporary dollar resilience can look to go long LUN in anticipation of renewed short-term price advances for the stock.
The Upside: Like First Quantum Minerals , another mining stock that was profiled here as a buy opportunity in early May, Lundin's stock has delivered a healthy return of over 50 per cent in its Stock Trends Bullish trend. The share price has immediate headwind at the $4.75 level, but a mining sector rebound in the coming weeks should drive LUN to new 52-week highs. Investors familiar with this stock know of its nasty descent from a 2007 bull market high of $15 to penny stock status at this spring's market bottom. Gone are the days of fraternal company with other mining giants in the blue chip S&P/TSX 60 Index - Lundin was given the boot earlier this year, its crumbling stock replaced with that of cheese maker Saputo Inc. (SAP-T). Shareholders can gloss over that insult and look toward price momentum that takes the miner's stock above $5 again.
The Downside: A stand by the Federal Reserve to help shore up the U.S. dollar, implying higher interest rates, seems unlikely in the immediate future. But that double whammy is the risk the commodity trade carries. Lest this trade turn into cheese again, investors should be ready to exit LUN at its October low of $3.25.
Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca