Investors Rushing to Mining Companies

The S&P/ASX 200 has made some considerable gains in the past few days. The market is now up 5.2%, to 5353.2 points, since the Brexit decision. And it has climbed 12.3% from the lowest point in February this year.

It certainly seems like all the fuss about uncertainty is over. However, there are still some who believe there are worse times ahead. This view is shared among some fund managers who are now looking for safe havens.

I don’t necessarily agree that there will be more pain ahead in the coming weeks. But it’s always advantageous to know where ‘big money’ is going. If you know the flow of the market, you can just profit of riding trends. This is what many momentum traders do on a daily basis. They ride the momentum of the market. However, this is not an easy strategy to follow.

Chances are your beliefs about the flow of the market could end up wrong. Or you could end up getting on the wrong side of the momentum. Either way, it takes a lot of practice and experience to trade in this way.

Don’t get me wrong, if you can pull it off, you’ll be on a yacht off the coast of Spain in no time. But even if you’re a buy and hold investor, knowing the flow of the market can be beneficial. If you understand the flow of the market, you can get into desired investments at the right time. Instead of buying shares that have already gained 40% — out of a 100% gain trend — you’re limiting your potential profits.

Imagine if you had bought in near, or at the very, bottom. The same is true for selling out of your position. Just think of how much more you could make if you understood how to sell out near, or at the top of, a trend. Again, you’d be sipping champagne on your yacht in no time.

So by studying the flow of capital, you can make better, more profitable decisions.

Yesterday, it was miners that were flooded with orders, bidding prices up. South32 Ltd [ASX:S32], Fortescue Metals [ASX:FMG] and BHP Billiton [ASX:BHP] were some of most traded stocks yesterday. Each accumulated volume of well over 10 million, with South32 exchanging hands 49.71 million times.

Off the back of the increased volume, South32 and Fortescue Metals were able to reach 12-month highs. Below is a graph of the three companies listed above. And as you can see, each has climbed considerably over the past five days. Most notable is South32, which is up 26%, to $1.95 per share.

FMD BHP S32 Share Price Chart

Source: Google Finance

Miners might be safe for now

In a research note, Credit Suisse analysts said South32 was viewed as a safe option by investors. It is ‘the lesser of evils among uncertain equity classes,’ Credit Suisse said.

There seems to be now a growing consensus that in the nearer term commodities may be a decent place to park money given the US [Federal Reserve] that has deferred its tightening and with China likely to do enough economic stimulus to underpin growth at reasonable levels.

Yet this doesn’t necessarily mean investors will become commodity bulls. However, it does open a real opportunity to invest in miners. For a long time the mining sector has been targeted by short sellers. And because of the stigma attached to miners, you might be able to pick up great mining stocks for cheap. Once you buy in, you could also be helped by ‘big money’ buying in, pumping up your position in turn.

But investing into any market is still risky, and you should be aware of those risks.

What happens if ‘big money’ starts to flow out of the mining sector? What will you do? Well if you’re prepared you’ll know exactly what to do.

When investing, you don’t go guns blazing into stocks because you hope they will go up. Even speculators have a plan before they jump into the market. Therefore, you need to determine what you will do in every circumstance.

How far does your position have to drop before you sell out? What is your desired gain, and how will you determine that it’s time to sell out? These questions are basic, but very important. That’s why you need to create a plan of what you will do, even when jumping into ‘safe’ markets.

And once you make plans, you need to stick to them. If you don’t, there’s no point planning, and you might as well be blindly gambling.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Always consider the risks when investing, especially when it comes to mining stocks. But if you can handle the risks, investing in miners can create huge potential returns. Money Morning’s resource specialist, Jason Stevenson, has 10 great Aussie miners that could yield triple-figure returns.

In Jason’s report, ‘The Top 10 Australian Mining Stocks for 2016’, he’ll reveal the reasons why you should buy mining stocks now. To get your free copy of Jason’s report, click here.

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