The performance of the Vaneck Vectors Rare Earth Strategic Metals ETF (NYSEARCA:REMX) during 2018 is an incredible example of how the sentiment of the broader market can overwhelm the fundamentals of an individual stock or industry.
Demand for rare earth metals continues to increase, which is a fundamental positive for most of the stocks held by REMX. However, the prices traders are willing to pay for those stocks in the face of the volatile uncertainty the escalating trade-war rhetoric between the United States and China is creating are falling dramatically. Traders don’t feel like they can accurately forecast growth rates in this uncertain global economic environment, so many are simply taking profits off the table and reducing their exposure to the market.
General Decrease in Chinese Stock Valuations
This bearish selling trend is most easily seen in the Chinese equity market.
Looking at the daily chart of the X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR) — you can think of the CSI 300 index as the Chinese equivalent of the S&P 500 index in the United States — in Figure 1, you can see that Chinese stocks have had an awful 2018.
Figure 1 – Daily Chart of Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR)
ASHR is down approximately 26% from its late January highs, and it doesn’t seem to be slowing its descent. The ETF could easily find itself retesting its early May 2017 support level of $24 in the not-too-distant future.
In an investing environment like we are currently seeing in China, it’s no wonder the daily chart of REMX looks so similar (see Figure 2).
Figure 2 – Daily Chart of Vaneck Vectors Rare Earth Strategic Metals ETF (REMX)
REMX is moving in lock step with the Chinese stock market because Chinese rare earth metals stocks account for nearly 37% of the holdings in REMX (see Figure 3).
Figure 3 – REMX Holdings (source VanEck)
Were it not for the selloff in Chinese equities, we expect REMX would still be consolidating, or maybe even climbing — like its largest non-Chinese holdings Iluka Resources Ltd [see Figure 4] and Amg Advanced Metallurgical Group Nv [see Figure 5] are — with the rest of the global stock market.
Figure 4 – Daily Chart of Iluka Resources (ILU)
Figure 5 – Daily Chart of Amg Advanced Metallurgical Group NV (AMG)
There’s an old saying on Wall Street that declares “You can’t fight the trend.” It’s true. No matter how appealing the underlying fundamentals may look, if the big traders haven’t bought into the narrative — for whatever reason — the fundamentals don’t matter.
In this case, traders haven’t bought into the narrative of why they should buy Chinese rare earth metals stocks because they are too preoccupied with selling Chinese stocks at the moment.
We still think the bullish fundamental narrative for rare earth metals stocks is going to be a lucrative one to watch in the future, but it won’t materialize until stability returns to the Chinse equity market.
You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here. As of this writing, they did not own shares of REMX.
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