Just like I told you in 2008, the best way to make money in commodity stocks this year is…

To sell them.

Before you call me crazy, consider some numbers: The benchmark commodity index has skyrocketed 60% since the March 2009 bottom… with a lot of the gains coming in the past eight months. Since September, crude oil is up 46%… silver is up 140%… and corn is up 65%.

This big move has produced amazing gains for readers of the S&A Resource Report. We recently closed out a 340% gain on gold and copper company Northern Dynasty. We’ve tripled and quadrupled our money in silver stocks… and we’re sitting on a big handful of stocks with gains in the 50%-150% range.

[ad#Google Adsense]After such a big run, the tendency for many investors is to believe it will continue running higher and higher without interruption. But this kind of thinking can kill your returns in the volatile natural resource sector

The biggest thing we have to remember about natural resource stocks is they are cyclical. This is another way of saying they boom and bust like crazy. One year, a given commodity will climb 50% or 100%… The next year, it will be down 25%.

This is just the nature of commodities. High prices will cause producers to bring on lots of new supply to cash in (which drives prices down)… and low prices will cause producers to shutter production capacity (which drives prices up). Commodities also attract a huge amount of money from fast-trading hedge funds… which adds another layer of volatility and risk. Speculation in some commodity markets is at an all-time high right now.

So… for investors sitting on huge gains in natural resource stocks, I encourage you to follow two rules of thumb…

1. Don’t get overconfident. Don’t let big returns go to your head… and don’t fall in love with your stocks. They won’t love you back.

2. Make sure to ride any boom with one eye on your trailing stops.

You should note neither of those rules say, “Sell everything and run for the hills.” I’m not telling you to dump all your commodity stocks right this second. And I think the long-term trend for commodities has plenty of room to run. But there’s a lot of “froth” in the commodity market right now. Also, we can’t know how long the U.S. government’s loose monetary policy will continue to drive money into stocks and commodities at an incredible rate.

This situation could last a few more months or a few more years. But we need to be aware that all the positive sentiment toward commodities creates a condition where the sector could suffer a brutal selloff. That’s why we’ve tightened our trailing stops to 15% on our biggest S&A Resource Report winners.

Steve Sjuggerud encourages folks to think of profit-taking situations like this: We got in early and picked a great seat in the middle of the movie theater. We’ve enjoyed a great show. But we could be near the end of the show… and the crowd in the theater could head for the exits at any time. So we’re going to move to the seat next to the exit.

We’re not leaving just yet. We’re going tighten our trailing stops to preserve gains and ride the trend as long as it lasts… while staying ready to exit before a possible stampede.

In sum, if you’ve enjoyed the kind of success my subscribers have had over the past few years, congratulations. You bought low. But remember that huge moves higher in resources can’t go straight up without an interruption. And be ready to ring the cash register if your trailing stops are hit.

Buy low, ride the trend, and sell high. Making money in commodities is that simple.

Good investing,

— Matt Badiali

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Source:  Daily Wealth