Even in day filled with less-than-stellar economic data and enough stocks trading in the red to pull the perma-bears out of hibernation, there is cause for optimism.

Today it comes from the companies that have anything to do with the world’s potash market.

Thanks to news that a key Russian producer is raising its prices due to increased potash demand, American firms like Intrepid Potash (NYSE:IPI), Potash Corp (NYSE:POT) and Mosaic (NYSE:MOS) are making strong gains.

The news is yet another strong indication of the profit potential currently held by the world’s commodities market. First we saw gold prices soar. Then oil. Then silver. And now potash prices.

Next up is your portfolio balance

As the world bounces out of this recession, demand will rise, inventories will fall and prices will naturally go up. The companies that directly see their margins rise as they pull materials from the ground will reward their shareholders with increased revenues and earnings.

Out of the three companies mentioned above, Potash Corp. is the largest. With 2008 revenues of $9.5 billion in 2008, it has the power to leverage strong gains in the potash market into strong profits for shareholders.

In an industry where size matters, Potash is king.

While today’s surge does not make this the greatest time to enter a position, a weak and volatile market over the next couple of weeks will create opportunities to enter a play.

Shares of the company have already doubled since their November lows of $47.54. But even at current prices of $97.75, there is an opportunity to rack up double-digit gains over the next few months.

Investors must be prepared to see trading resistance at the psychologically important level of $100 per share. As long as the bears are threatening to attack, prices will remain volatile anywhere close to that price.

The action will force buy-and-hold investors to pull out their hair. But short-term traders will take advantage of the action to make fast in-and-out moves.

The commodity markets are alive and well these days. They may look different than just a year or two ago, but if you are into making money, there are few better places to get the job done.

Source: Potash Is on the Move

On a day when the market is having a tough time finding the guts to make a significant move in either direction, there is a surprising amount of stocks deviating from their normal volume patterns.

Continuing with my thoughts on volume from yesterday and the indicator’s strong ability to predict future action, I thought I would take a look at Intrepid Potash (NYSE:IPI).

The stock’s trading volume is roughly about 30% higher than average today.

What does it mean?

At first glance, the activity appears bullish. Shares are in positive territory; meaning buyers must outnumber sellers.

But digging a bit further, it appears the majority of the strong buying activity came early this morning, a continuation of yesterday’s rally. Once the buying slowed down, few investors were willing to step in at the intra-day highs around the $32 level.

Trading cooled off and so did share price.

The volume activity gives us a potential glimpse of things to come. Potash, used heavily in the agriculture industry, was significantly discounted as the global economy screeched to a halt last winter. But now that a light is starting to appear at the end of the tunnel, investors are climbing back into stocks. Investors are surprising optimistic about potash and its demand.

Volume tells the truth

Most indications show the market is overly bullish on the commodity. It appears potash-related positions are due for a drop.

There is one volume-related indicator in particular you should know about: the number of shares sold by insiders.

These folks know the company the best. They know the potash market, its demand and they have a strong feel for what’s ahead. So when I suddenly see insider selling ramp up, it is a surefire clue to pay attention.

The fact that an Intrepid Potash director reported unloading 800,000 shares last week may not be a perfect indication of a drop in share price to come, but it is certainly a glaring sign warning investors to keep alert.

Of course, no good investor will ever buy or sell a stock based merely on a single day’s worth of volume history, but unusual activity is always a great place to start your screening process.

With Intrepid Potash, volume tells us shares may be reaching their near-term peak and are poised for a drop. At least one insider believes now is the time to sell.

Remember, those volume statistics are there for a reason. Use them to your advantage.

Source: Eye on Volume: Another Look at a Strong Indicator

Q: Any new comments on the refiners? – C.

Record high oil prices are brutalizing refiners. They can’t pass along the rising costs to consumers, so the companies’ margins are down to whiskers.

In April, I thought things couldn’t get worse. The price of a barrel of oil cost more than the amount of gasoline you can make from it. It didn’t make sense… It was like a bushel of wheat becoming more expensive than the bread you could make from it.

But that’s exactly what happened two months ago. So I figured gas prices had to rise, increasing the refiners’ margins, and jacking up their share prices. But since then, the price of oil has risen faster than the price of gasoline. The “crack spread” – the difference between the cost of oil and the price of gas or diesel – has worsened, and refining stocks have fallen further.

I was too early, but the situation still looks good for big gains… when and if the price of oil declines. If you own refiners, keep holding with an eye on your stops.

Q: I hear the same argument for natural resources as for agriculture – short-term peaks and long-term demand. What’s a short-term versus long-term strategy? – R.A.

I look at the long-term argument for agriculture investment as a function of population and modernization. The world has more people living better, and many of those people want to live like Westerners. That means eating more beef, chicken, and pork, which in turn takes a whole lot more soybeans and corn. So agriculture will continue to rise in the long run.

In the short term, agricultural stocks will face the same ebbs and flows of any market. And right now, I think we’re seeing a short-term peak.

Look at the current situation in fertilizer stocks, for example. Intrepid Potash (IPI) trades for more than 100 times earnings. Potash Corp (POT) trades for more than 40 times earnings.

These are mining companies… They usually trade at a discount to the overall market (which has a P/E of 18). How do you expect to make money as in investor when you are buying a depleting asset at 40 times its current earnings?

My inclination is to stay away from these stocks at these valuations. I’m sure you can find a few gems out there, but the big, easy money in most ag stocks has been made.

Q: What’s going on with copper? Is it too late to buy copper producers? – L.M.

Copper is a critical component of housing, cars, air conditioners, plumbing, and electricity transmission. If you don’t have copper, you don’t have modern civilization. So copper prices, much more so than gold and silver, reflect the health of the global economy…

From 2000 to 2007, the world’s copper production grew 14%. Global demand has risen at a steady 4% a year for the last 100 years, but Chinese demand for copper doubled between 2001 and 2007.

In fact, from 2000 to today, China’s growing demand for copper has accounted for 99% of the global growth in copper consumption.

China holds 16% of the world’s copper-smelting capacity, so turning copper ores into copper pipe is clearly a major industry in China. But very little of that finished copper leaves the country. Of all the raw copper China imported in 2006, it exported about 26% of it as finished goods. In 2007, that number dropped to 9%. This year (through March), China only exported about 3% of that copper. That means domestic demand for finished copper is growing.

In other words, China is solely responsible for the rising copper price. At $3.75 per pound, copper is trading near all-time highs… up roughly 400% in the last five years.

I know you don’t read Growth Stock Wire for my analysis of China’s economy… And I’m not going to try to guess what the suits at Goldman Sachs have trouble guessing. I’ll just say I believe copper prices are going to remain high enough for us to make terrific gains in base-metal producers.

Good investing,

Matt

Editor’s note: Natural-resource expert Matt Badiali answers reader questions every Wednesday in Growth Stock Wire. If you’ve got a question for the Commodity Investor, drop us a line.

Source: The Commodity Investor Q&A

JL: So I’m guessing you had a busy week.

CASH: How can you tell? I know you can’t see the dark circles under my eyes through the phone. Is my voice twitching?

JL: Haha — no, you sound fine. But the calendar really picked back up. You had to be in there making all kinds of moves.

CASH: You’re starting to sound like a trader now! I like it!

JL: Whaddaya mean “sound” like a trader? I’ve been runnin’ and gunnin’ for as long as you… maybe just not as quick on the draw…

CASH: I know, I’m just playing with ya. Our mutual love of markets is how we became friends in the first place. And yes, there were a bunch of deals this week. It’s definitely kept me busy. We already talked about what a success Intrepid Potash (IPI:NYSE) was right out of the gate, and the stock actually booked an even higher close on Friday. What a great story!

JL: Are you buying more IPI then?

CASH: Not right this moment. I’m still holding half of my position to see where the momentum takes it, but I wouldn’t be a big buyer again just yet. Patience is a virtue…

JL: Indeed. Speaking of patience, what happened with American Waterworks? You weren’t too excited about the short-term prospects on that one. I think you were getting a share allocation when we last talked.

CASH: Ugh. Yeah, I got all I wanted on that deal.

JL: Uh-oh. If you never get enough of the good ones, that’s not great sign.

CASH: You can say that again. When you get all the stock you signed on for and your guy calls you back and says, “Great news! I can get you another 10,000 shares, no problemo!” you know it’s going to be a long day.

JL: So did you, ah, take a bath on American Waterworks then?

CASH: Ouch, bad pun alert. Nah, I’m too slippery for that. I got dinged, but it was small beer compared to my IPI gains. I’m now actually out of American Waterworks completely. But my guys are all thankful that I took shares off their hands… and their managers are excited to see that I’m still long.

JL: Come again? You said you were out of the stock completely, but the managers still think you’re long it?

CASH: Heh. This kind of thing is a big reason why we use a pen name in these conversations.

JL: That and the fact it’s fun to goof around with your name.

CASH: True — can’t underestimate the value of having a little fun. But as far as day-to-day trading goes, I play little games with these underwriters all the time. It’s not uncommon for a “long” position with one investment house to be neutralized by a “short” position elsewhere — without the first party being any the wiser. This isn’t anything exceptional. It’s just a part of doing business when your business involves maintaining relationships on the street. With a stock like American Waterworks (AWK:NYSE), I knew I’d have to protect myself by taking some “covert action.” So I did.

JL: For the benefit of our readers, can you quickly hit the highlights of what made AWK a bad deal? What were the danger signs, or clues, if you will?

CASH: Sure. Since AWK didn’t have enough demand from the get-go, they had to lower the price significantly to get the deal done. That was clue No. 1. Clue No. 2 was when I got all the stock I asked for from at least from different brokers. With that, I knew they were having trouble finding a home for all the shares — certainly not a positive development. Finally, when the actual stock issued, it immediately traded down 50 cents or more. That put me in full damage-control mode.

JL: So what does that look like? Explain how you control the damage without stepping on the toes of the underwriters. Obviously, we know that if you just liquidate your holdings en masse, the underwriters will get their feelings hurt and you won’t be on the list the next time a good deal prices.

CASH: Right. I went to a good discount broker, another of my many contacts, and got a borrow on the stock. In other words, I found someplace else to short it. Sometimes this is difficult and I have to look more than one place before I find stock I can short.

JL: To keep our readers up to speed, let me get this straight. In order to short a stock, a trader first has to get a legal “borrow,” which involves finding someone else’s long shares. The trader then sells this “borrowed” stock on the market, with the understanding that he will eventually re-purchase the shares and return them to the broker. And this is all usually pretty cut and dry established stocks, but can take a bit more time to pull off with a brand-new or thinly traded stock.

CASH: Exactly. So once I got hold of a borrow, I spent the rest of the day shorting the same amount of American Waterworks stock I held long in my underwriter accounts. So now, if AWK trades up big, I’ll be ticked because I’ll lose just as much on my shorts as I make on my longs. That’s the price of neutralizing the downside.

JL: But you don’t see a big uptick for AWK anyway.

JL: So, here we are after another few days of unpredictable action. Big rallies on strong volume followed by weakness in the face of $120 oil and more bad banking news. How’s it look to you? Think we’re out of the woods yet?

CASH: Yes and no…

JL: There’s a nice definitive answer. Should we shake the Magic 8-ball again?

CASH: Ha ha. Not messing around this week, eh? You’re right, though — it’s tough to have definitive answers in this kind of market. There are so many different time frames and elements to consider. In all fairness, though, I’ve been pretty dang definitive in the trading calls I’ve made these past few months.

JL: True that. You’ve had a pretty hot hand, no doubt. Tell me a little bit more about what you’re seeing overall right now. There seems to be a lot of curveballs flying around.

CASH: Definitely. That big rally on Friday was yet another one. It looks like a strong accumulation day to go along with strong momentum on good volume. But remember what Friday was…

JL: You mean because Friday was the day before Passover weekend? But that would lead to lower volume because of at least a few traders taking the day off, wouldn’t it?

CASH: True, but I’m talking about something else. Friday was also an options expiration day.

JL: Ah, right. Forgot about that. So what does that say about the rally?

CASH: Options expiration days can bring in extra share volume, as traders close out, hedge and re-hedge positions that are affected by contracts expiring. In the last few months, we’ve seen big volatility around expiration days. We’ve also seen traders who are short “out of the money” contracts suddenly caught napping by a sharp move, forcing them to trade out of a tight position. This is the kind of thing where volatility leads to more volatility. The movement can feed on itself and really pump up the market (or knock it down, depending on what’s happening). At the end of the day, I think Friday’s rally was more of a technical move than an actual fundamental shift in the economy.

JL: For our readers who may not trade options or know the mechanics of options, can you give a quick summary of how this works?

CASH: Sure. To start, imagine you were shorting call options on the Dow at a strike price of 12,800. This means you’d be collecting a premium for selling Dow 12,800 calls to the bullish traders who want to buy them. You would receive cash for selling the contracts, and as long as the Dow closes below the strike price at expiration, you get to pocket the cash you sold the contract for.

JL: So the example you just gave is called selling “naked options,” or naked short selling, because the options seller wants the options to expire worthless so he or she can pocket the premium. It’s also extremely dangerous and NOT recommended, because the risk is so open-ended.

CASH: Exactly. Naked options selling may be dangerous, and even foolhardy, but some brave souls do it anyway. It’s different when professionals do it, especially when there are day-to-day strategies for managing the position, but I don’t blame you for sounding an extreme note of caution — especially given the famous trader “blowups” attributed to naked options selling.

JL: Let’s keep going with your example.

CASH: Okay. So let’s say you (or some confident soul) has sold short a bunch of calls on the Dow. You expect the Dow to be flat to down, or at least not to rise above your strike price, so you can keep the premium you collected. But once the index starts trading up and flirting with your strike price, you’ve got a reason to sweat. Here’s where you hedge your risk by purchasing stock.

JL: So a trader is short Dow calls in a neutral-to-bearish bet. He expects the Dow to be flat to down. The Dow starts trading up and threatening to wreck his position and cost him a lot of money. So he starts purchasing stocks — probably shares in the Dow Jones components — in order to offset his risk. If the Dow keeps going up, that means the value of the shares are going up, and so the money he makes on his hedge is meant to offset losses that could be building up on his short options position.

CASH: Yep. And now imagine that a lot of traders were short those Dow calls, or otherwise bearishly inclined after the GE news of the week before. If enough traders were set up in the same manner — which is more likely at a key resistance area — then once the market moves through a certain price point, it can set off a chain reaction of short covering and long-side buying to hedge positions.

JL: So you think Friday’s rally wasn’t quite the “all clear” sign that some might have believed. Instead of signaling fresh optimism, it was a bunch of traders scrambling to hedge their shorts and bailing out of losing positions.

CASH: Exactly. But there’s another side to that coin — and what I’m about to bring up shouldn’t be a surprise to you. After all, we’ve been talking about this week since this time last month.

JL: We have? Refresh my memory. What was last month?

CASH: It’s been almost a month since the Visa deal! And as I’ve said, it takes several weeks to get the road shows underway and bring everybody onboard, but now it’s happening. We’re about to see a big ramp in the IPO markets.

JL: Yes, it’s coming back to me now. And I think you mentioned we have three deals up for this week, too. So you’ve got to be busy with last-minute details right?

CASH: Three? Try five, big boy!

JL: So did you just miss a couple of them last week?

CASH: I’m hurt! Do you really think I was just not paying attention?

JL: I could never think that about you, amigo. That trader’s mind of yours is just too sharp. But where did the other two come from?

CASH: Well, companies and underwriters alike see that the sun is shining for now, and that this could be their only chance to make hay for a while. So now Hatteras Financial Corp (symbol HTS) and Whiting Petroleum Corp (symbol WHX) are on the roster, along with four secondary offerings. Another solar company has placed a stake in the May calendar, too… so we’re starting to see these guys come out of the woodwork.

JL: That’s a lot of new action. The natural question, then, is whether this flurry of deals will dilute the market. How many new issues can this market handle? Will we see less strength than we might have with so many companies competing for the limelight?

CASH: That’s actually a pretty good point. Underwriters do try to spread inventory out over time, as many hedge fund guys (like me) don’t want to be spread too thin. Most traders like to have a few concentrated positions in their favorite names, and are less likely to buy a dozen brand-new companies in the same week. So it’s definitely a balancing act. The underwriters want to take full advantage of a strong market, and yet if they get too greedy and push the deals too fast, many of those deals could flop.