Rio Tinto (RIO) Has Dark Future

Beware the Ides of March

Rio Tinto CEO Jean-Sebastien Jacques sat down with a Bloomberg reporter today and posited: “Is China slowing down today?…The answer is yes.  But it’s changing as expected.  We have no surprises whatsoever.”

My first boss when I got out of school was a finance guy, all about the data and how the market was going to respond to new information, a young commodities trader named Lee Cordon.  Whenever some CEO would come out and talk about some issue and use superlatives like “never” or “whatsoever,” he would shiver and smile and say: “Methinks thou dost protest too much.”

It always unnerved him when these guys would be so defensive that it made him think the opposite about whatever the situation reflected.  In short, perhaps Mr Jacques is actually afraid that this China slowdown IS a big deal, like a really big deal.  In the same interview, he goes on to mention the Chinese government launching their stimulus package.  Well, this seems to already be priced into the market with Rio Tinto’s stock (RIO) rallying the last few months from 45 to 60.



Broker Downgrades

A number of brokerages recently weighed in on RIO. Goldman Sachs Group downgraded RIO from a “buy” rating to a “neutral” rating in a report on Wednesday, February 27th. They noted that the move was a valuation call. Societe Generale downgraded shares of Rio Tinto from a “hold” rating to a “sell” rating and set a $55.23 target price on the stock. in a report on Thursday, March 7th.

UBS Group downgraded shares of Rio Tinto from a “buy” rating to a “neutral” rating in a report on Wednesday, March 6th. Bank of America downgraded shares of Rio Tinto from a “neutral” rating to an “underperform” rating in a report on Thursday, February 28th.

Finally, HSBC downgraded shares of Rio Tinto from a “buy” rating to a “hold” rating in a report on Friday, March 1st. Five equities research analysts have rated the stock with a sell rating, twelve have given a hold rating and three have issued a buy rating to the stock. The company has a consensus rating of “Hold” and an average price target of $56.66.

Additionally, although DE Shaw and other notable funds increased their holdings of RIO, nevertheless One Wealth Advisors LLC lessened its holdings in Rio Tinto plc ADR (NYSE:RIO) by 17.7% during the fourth quarter, according to the company in its most recent Form 13F filing with the SEC. The institutional investor owned 6,764 shares of the mining company’s stock after selling 1,454 shares during the quarter.

I believe that One Wealth Advisors is on the right side of this trade at least in the near-to-medium-term.

60 seems like a fairly solid monthly overhead resistance here and I would not be surprised if we popped up a little bit on a head fake, then sold off sharply in the coming weeks/months.

Some Storms & Squalls on the Horizon

Reuters announced that “Rio Tinto, the world’s No. 2 iron ore miner, said on Sunday it was suspending rail operations in the Pilbara region and mining at the Robe Valley operations in Western Australia as a severe tropical cyclone hit the state’s far north.

The suspension comes after Rio, BHP, and Fortescue on Thursday cleared their ships from ports ahead of Cyclone Veronica, which reached land south of Port Hedland, the world’s largest iron ore export hub.

A red alert was issued in Pilbara, with residents between Pardoo and Mardie asked to take shelter and brace for high-speed winds and rising tides, according to the Department of Fire and Emergency Services.

The Bureau of Meteorology said gale-force winds and torrential rainfall of up to 500 millimeters could be expected by Monday.”

Also, RIO’s recent drop took place on significantly more volume which surged nearly 3.28 million contracts yesterday versus its daily average of 3 million.  Indeed, while the market has undoubtedly priced in these events, we still could have a conflation of both fundamental and technical triggers that push the share price lower here soon.

Rio Tinto Monthly Chart

Rio Tinto Monthly Chart


Speaking of Technicals

We are currently seeing strong bearish divergence with regards to the StochRSI, the MACD, and the regular RSI as we hit 60 a third time, which is my favorite number when it comes to the markets.

John Murphy’s tome “The Technical Analysis of the Futures Markets” and seemingly every other market book I’ve read — whether commodities or equities or both — has referenced that “things happen often in threes” and it’s something I’ve found to be helpful in my travels and travails as a market professional and participant.

My Price Target

I believe we could see 45 as a potential target as it’s been the recent monthly support level.

However, this share price might even pop lower than that over the coming weeks/months on the heels of this accelerating Chinese slowdown which also may be a strong catalyst regarding casino stocks as I went over in my earlier article.

I like this setup mostly because we have a straight-forward exit point.  If there is a monthly close much above 60, we get out as we may see at least one strong leg higher or maybe even a longer bull run (or at least a non-trending slightly bullish move).

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