Rare-earth stocks caught fire in the second half of 2010, with many components going vertical after momentum players piled into the speculative sector in force. The group topped out when the calendar flipped into January and spent several weeks shaking out overzealous bulls. The most popular names hit intermediate support late in the month and have now turned higher.
Real demand drove the rally's first leg, in a natural reaction to Chinese domination of active rare-earth mines. But the second leg, which took place in late December, raises a red flag, because the thinly traded Market Vectors Rare Earth Strategic Metals ETF (REMX) may have triggered an unnatural buying panic over the Christmas holiday and lifted components into parabolic spikes.
If the derivative tail was wagging the rare-earth dog on that second rally, the sector could now have a tough time finding enough committed buyers to get back to the 2010 highs, unless China helps out with a brand-new embargo. Barring that event, market players will need to focus squarely on the technicals, looking for clues about the future of this unique group.