Playing the Market — the Best Sector to Be in Right Now

stock market uncertaintyVolatility in stock prices is good for traders and usually wreaks havoc on investors. There’s a reason why participation in the current equity market is so low; individual investors are worn out with all the ups and downs. Furthermore, there’s no definable outlook to the current economy, and that uncertainty (above the usual uncertainties) has scared away a lot of part-time equity investors.

But, with this uncertainty comes big price moves and, frankly, it’s a great time to be a position trader in equities. The last 12 months have provided a lot of good stock trades, albeit in an environment with very high investment risk.

One security that’s always worth keeping an eye on if you like to trade stocks is First Solar, Inc. (NASDAQ/FSLR). Since late 2008, this stock has basically been trading in a wide range between $100.00 and $200.00 a share. Over the last six months, this trading range has tightened to between $100.00 and $150.00 a share and the action is always highly liquid. This is just the type of equity security you can trade from both sides of the market.

Before the financial crisis, some of the best trading action was in U.S.-listed Chinese shares. While most of these listings were small-cap in nature, they often exhibited big price moves based on news. Now, the best trading action is in precious metal shares, but the bias here has been mostly on the long side due to record-setting prices for the underlying commodities. There are still good gains available from this market sector, but, as I’ve written before, they will be incremental. The big gains going forward in this sector will be from mergers and acquisitions. As you know, gold and silver companies are awash in cash, with not very many places to put it. Kinross Gold Corporation (NYSE/KGC) just completed its $7.0-billion acquisition of Red Back Mining Inc. (TSX/RBI). The combined company expects to be producing some 3.9 million ounces of gold a year by 2015.

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With so much money floating around the mining industry now, and so few properties containing the minerals, it should pay handsomely to own a basket of mining shares. Even if commodity prices go down, mid- and large-tier mining companies are highly likely to engage in a spree of acquisitions over the 18 months. There’s no other place to put their excess cash. Treasuries don’t pay much.

The best trades in the mining sector are therefore the companies that are most expected to merge with each other, not necessarily those to be acquired by the biggest players. CEOs typically have big egos and one of the most important goals in the mining business is critical mass. Size lowers cost per ounce. Betting on the mid-tier players merging with themselves is one of the best plays in the equity market right now. Institutional investors are getting on board.