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In the 15th October Interim Update, under the heading “The REE Bubble”, we wrote that all the REE-related stocks that we track except for Neo Performance Materials (NEO.TO) were now in bubble territory. This was not only because equity prices had gone parabolic, but also because the price gains in the stock market were not supported by price gains in the underlying commodities. We went on to write that the bull market possibly had years to run, but the risk of an intervening crash had become high. Therefore, we recommended that anyone with significant exposure to REE-related stocks who had not yet harvested meaningful profits, should do so right away. Our warning was well timed, because a crash began almost immediately.

The first of the following daily charts shows that MP Materials (MP), the largest (in terms of market capitalisation) stock in the REE sector and a stock that we use as a sector proxy, fell by 50% from its October high to last week’s low. The second chart shows the performance of USA Rare Earth (USAR), a stock that looked very expensive in early-September — BEFORE it tripled in price on the way to a blow-off top in October. USAR lost two-thirds of its value from its October high to last week’s low.

On average, the prices of the REE stocks on our radar screen fell by around 50% from last month’s high to last week’s low. The stock price of Neo Performance Materials (NEO.TO) held up relatively well and suffered a peak-to-trough decline of ‘only’ 32%, because it didn’t rise by as much in the lead-up to the top and because its current valuation is underpinned by current revenue and earnings.
 

The way these things usually go, the initial phase of the crash will be followed by a rebound to a lower high, a decline that tests or breaches the initial low, and then several months of base-building. After that, the next leg of the bull market possibly will begin. Note that last Friday’s price action suggests that the initial phase of the crash is complete, so over the weeks ahead there probably will be a rebound.

With commodity-related stocks, we like to do most of our buying during base-building periods and to scale-out during the parabolic rallies.

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