After investors sent the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) up 4.5% last week, this week investors appear to have changed their mind and are sending stocks lower once again. So far this week the index is down around 0.9%.
Amongst the sectors faring particularly badly are energy and resources.
In the case of iron ore, a four-day rally has hit a wall with the metal sinking 1.5% to below US$55 a tonne. In response, all three of the major iron ore producers are trading lower this week with BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) down 2.6%, 3.8% and 8% respectively by the close of trade on Wednesday.
The past three months have seen Fortescue rally by over 20% as investors have become more comfortable that the group will find a way to navigate through the current cyclical low. In comparison BHP is down 9% over the last three months, while Rio Tinto is flat.
Although some investors have called a bottom in the cycle and perhaps they are right, arguably an even more pressing question to answer is – just how long the commodity cycle could bump along the bottom?
Consider the following quote which is attributed to famed investor Seth Klarman:
"Sometimes being too early becomes indistinguishable from being wrong."
While value investors may be tempted to start buying into beaten-up iron ore stocks there are plenty of reasons to show restraint in adding resource stocks to your portfolio.
Chinese data remains weak with the latest figures on trade performance showing both imports and exports fell – exports were down 1.1%, while imports were down 17.7%.
Adding to the negativity, the latest data on China's inflation showed that the rate had slowed to just 1.6%.
The weak figures have reignited fears that the global economy will struggle to grow in the face of declining growth rates in China. Given these headwinds the outlook for iron ore producers remains muted and it could be some time before the outlook improves.
