Understanding the pullback for lithium stocks

The past 2-3 weeks has been a euphoric run for lithium investors following an almost vertical bounce back from the Russia-induced selloff in mid-March.

Tuesday marked a bearish reversal for most lithium stocks as a brief morning rally was met with heavy selling. It wasn’t uncommon for stocks to fall more than -5% from intraday highs. 

Selling continued on Wednesday, with large cap names like Pilbara Minerals (ASX: PLS) and Allkem (ASX: AKE) down -5.6% and -2.8% respectively.

Pullback drivers

Things don’t go up forever

Lithium stocks have been running hard. Especially emerging players like Core Lithium (ASX: CXO), Lake Resources (ASX: LKE) and AVZ Minerals (ASX: AVZ). Between mid-March and April highs, the three stocks rallied an average of around 85%.

A quote from US trader Mark Minervini really resonates with the ongoing pullback. Though, the comment refers to US indices. 

“If the indexes continue to run up extended from here with no pullback, the odds of a sharp or quick pullback will increase.

Investors should observe how the stocks behave during the pullback and if they can stabilise after the recent 10-15% decline.

Broader market weakness

The lithium pullback has been in parallel with a broad-based selloff across equity markets. 

Wall Street has been dipping for two-consecutive days, driven by:

• Hawkish stance from the US Federal Reserve

  • Fed Governor Lael Brainard said on Monday that the central bank could begin shrinking its balance sheet in May, at an accelerated pace

  • Kansas City Fed President Esther George said that a 50 bps hike is an option they have to consider

• China has put Shanghai - the nation’s largest city and economic engine with around 25m residents - in lockdown as cases surge to record highs

  • On Wednesday China’s services PMI plunged to 42 in March from 50.2 in February. A reading below 50 indicates contraction

  • The lockdowns have also halted Tesla’s Shanghai megafactory

A potentially more aggressive Fed has once again triggered a rotation away from sectors vulnerable to rising interest rates, notably tech.

During this time, defensive sectors such as utilities, real estate and consumer staples have underperformed.

The risk-off attitude has likely amplified the pullback for lithium stocks. It looks like even the most bullish sectors aren't able to swim against the tide of the broader market.