If you own any mining stocks... or you're thinking about jumping into these stocks right now... I have two charts to show you. I hope they can change your mind.
The first chart is the past year's action in a stock I closely track for DailyWealth readers, Freeport-McMoRan (NYSE: FCX, Stock Forum).
Freeport is the world's largest-publicly traded copper producer. It controls the giant Grasberg mine in Indonesia. Its size and liquidity makes it a favorite among "fast money" hedge funds when they want to take advantage of commodity rallies.
As you can see from the chart below, Freeport enjoyed a huge rally from March 2009 to January 2010. The stock tripled in just 10 months. This rally attracted lots of "momentum players"... the traders who like to jump on a rising asset and ride it for a few months' worth of gains.
But notice how Freeport shares declined into the mid-$60s in February (A). This was in response to the general stock and commodity weakness during that time. The stock managed to recover and challenge its highs (B). But in the past several months, Freeport has sold off heavily... and in the just the past few days, the stock violated that February low. This is a terrible "downside breakout" for Freeport. Even worse, it came on huge trading volume (C).
Now, I'm not picking on Freeport specifically. It's just the "bell cow" of the copper business. Let's also look at iron-ore producer Vale...
Vale is to iron ore as Freeport is to copper. Vale is the world's largest producer. It's a giant company with a $125 billion market cap.
Like Freeport, Vale enjoyed a huge price run from March 2009 to early 2010. This run, however, has sputtered... and Vale sports the same ugly "uptrend to downtrend" chart pattern... and has the same massive selling pressure as Freeport (D).
Do these high-volume declines mean Freeport and Vale are going to plummet 50% or 75%? Not necessarily.
But commodity stocks like Freeport and Vale tend to boom and bust... Because of this "boom and bust" nature, they tend to attract risk-taking "hot money" hedge funds. I see the high-volume declines as proof that the hot money is exiting these trades.
Fundamentally, things don't look so great, either. Europe is China's largest trading partner. If China's economy slows down in response to the troubles in Europe, you're going to see a big decrease in commodity demand. This is a huge risk for both Freeport and Vale. (Large existing stockpiles of base metals might pose another problem. You can read more about that here.)
Freeport, Vale, and most other miners tripled recently in response to folks wanting to take risk... in response to optimism returning to the market. If that flight to risk turns into a flight from risk... and if widespread optimism turns into widespread pessimism... these stocks can easily go back to where they came from in 2009.