Keep a watch on London’s mining stocks

The mining sector has enjoyed a stellar year, rising 90% since its January low, but is there more to come?

Mining trucks
Source: Bloomberg

We’ve seen something of a pullback in the mining sector over the past week, with the index itself falling by around 8%. However, there is no reason to think the rally that began back in January (and has seen remarkable gains for some names, and with the sector itself up 90% since the low) has come to an end.

Admittedly, some of the names in the sector look expensive, with the likes of Antofagasta, Glencore and BHP Billiton trading at hefty multiples on a forward P/E basis (on 41, 33 and 27 times earnings respectively for a one-year forward P/E). Much coverage has been devoted to the performance of dividend payers in solid industries like tobacco, pharma and drinks, but if the rally in markets is to continue it is growth-oriented sectors like mining that need to take over.

There is certainly an impressive rising trend on the daily chart, with the current drop not even denting the general upward move. In fact, we should look to welcome another drop like that seen in April and May, when over 20% was wiped off the sector. There is a 10%+ gap between the current price and the 50-day simple moving average (9804), which some technical analysts would argue means a retracement needs to occur.

Dip buying should be the approach here, so a further pullback is to be welcomed, with one approach waiting for stochastics to go all the way to oversold levels (as happened in May), before looking at trying to catch the bounce. Even if it does not go as far as oversold this time around, it will be worth keeping the sector and its big names on the radar.

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