Shares of Fortescue Metals Group Limited (ASX: FMG) have been hit hard today with the stock trading 6.2% lower at $2.41 late in the session. The fall comes despite the iron ore price climbing for the eighth consecutive session overnight.
So What: Iron ore has rebounded in incredible fashion over the last three weeks or so, having climbed nearly 27% from a 10-year low of US$46.70 to today's price of US$59.09 a tonne. While the major catalyst behind the rally appears to have been confirmation from BHP Billiton Limited (ASX: BHP) that it would slow its expansion, a rising oil price and falling short interest have also played their roles.
Although Fortescue's shares have sunk today, it seems likely that investors are taking their profits off the table. The stock has enjoyed similar strength to the commodity, having risen 36% over the last week and 47% since 13 April.
While the market is clearly becoming more confident that iron ore's recent rebound can be sustained, investors need to recognise that Fortescue remains a high-risk bet for their money. Should the price of iron ore experience a sudden reversal (which many analysts are still expecting), Fortescue's shares could once again be slammed if it is unable to turn a profit on its operations.
Notably, BC Iron Limited (ASX: BCI) has also retreated 5.7% today, after having more than doubled in price over the last week.
Now What: When a sector is performing as strongly as the iron ore industry has over the last week or so, investors can tend to feel compelled to put their money on the table in hope of further gains. While further gains are certainly possible, there is a very real chance the recent rally will prove only temporary, leaving those investors who decide to buy exposed to the downturn.
'Foolish' investors would be wise to give the miners a miss in favour of safer and more promising long-term investments.
