Why The Fortescue Metals Group’s Share Price Recovered Today

What happened to the FMG share price?

Despite Fortescue Metals Group’s [ASX:FMG] dramatic drop over the last few days, the stock recovered all of its weekly losses in early trade today. It should be apparent to investors that the resources sector is extremely sensitive to the macro environment right now.

Why did FMG shares do this?

Yesterday, BHP Billiton [ASX:BHP] expressed a view that they see further downsides in iron ore prices on the horizon. This was a hit to the already-fragile sentiments surrounding commodities. Nevertheless, commodities have actually done much better than before. We are finally seeing oil at a much higher price than the mid-US$20 a barrel level. We are now close to US$40 a barrel, with many analysts calling it a bottom.

Iron ore has a positive correlation with both energy prices and the Aussie dollar. It is no surprise that the sharp recovery in oil has led to a rally in iron ore prices, which also boosted the Aussie dollar.
However, the reasons behind the rally are largely unknown. We can speculate on the factors that led to this recovery, such as China’s pledge to a soft landing. Monetary stimulus, via the Bank of Japan and ECB, could have also played its part in this.

Overnight, we saw a dovish tone from the Federal Reserve, which left its benchmark rate unchanged.

I want to remind investors that not much has changed fundamentally. However, it is also true that fundamentals change subtly and we are, no doubt, in a period of rebalancing. It is only price-discovery that occurs more abruptly. I believe the recent recovery was a realisation of the oversold situation we have been in. The market has quickly adjusted its pricing to a less-bearish level. Now, less-bearish doesn’t mean bullish, it just means not as bearish as before.

What now for FMG?

I have been running FMG in my own trading portfolio (more than one asset) for the last two weeks. I have had a long position, which hasn’t produced many gains. The reason for selecting FMG in the first place was due to its strong recent momentum. Fundamentally, I speculate that commodity stocks are oversold relative to their long term values.

In terms of modelling the trade, a quant-based algorithm should have had a long signal for FMG in the last six months, generating close to 29%. The current month is a long position. Based on yesterday’s closing data, next month should be another long position. Should pricing in the rest of this month change substantially, a change in signal direction could occur.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

Join Money Morning on Google+

At Money Morning our aim is simple: to give you intelligent and enjoyable commentary on the most important stock market news and financial information of the day - and tell you how to profit from it. We know the best investments are often the hardest to find. So that's why we sift through mountains of reporting, research and data on your behalf, to present you with only the worthwhile opportunities to invest in.

Become a more informed, enlightened and profitable investor today - by taking out your free subscription to Money Morning now.

Money Morning Australia