Wednesday, March 23, 2011

Uranium Stocks - Oversold? Maybe. Undervalued? Not Even Close.

Frankly, I'm getting tired of hearing people come onto CNBC and talk about how the uranium sector is oversold and is a screaming buy here. Sure, the sector may be "oversold" by traditional terms. But just like a stock can keep rising while it is overbought (example: NFLX) there's no reason a stock has to bounce just because it is oversold. Especially when it has the burden of a near nuclear meltdown hanging over it.

I think what the bulls are forgetting is that the massive rise we saw in both uranium and uranium miners was based not only on existing and approved projects, but also on the prospects of a "nuclear revival" worldwide that would see a spike in new nuke applications and subsequent approvals. The last I heard Canada, Germany and even China have put a hold on all new nuclear applications until further safety studies can be completed.

Uranium prices were $40/lb just last summer and Cameco (CCJ) was trading in the low-$20's at the same time.

Exactly how is the nuclear industry 50% BETTER OFF than it was last summer?

From a technical perspective, what we witnessed in CCJ over the past 3 trading days is nothing more than a classic "dead cat bounce". Individual investors have bought into the oversold story, and some of the shorts that sold much higher are simply locking in profits. The little dip above the 200dma yesterday probably stopped out a few more shorts causing even more buying.

But none of that changes the bigger picture, which is that the sector is under a cloud of uncertainty, and prices are still about 50% higher than they were less than a year ago. That doesn't sound like a sound thesis for going long. There are still a lot of large investors that are long shares in CCJ from higher levels. They will see every bounce as an opportunity to sell. Technically I don't see how CCJ doesn't at a minimum go back to test the $21 level.

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