The U.S. Materials Sector
The U.S. Materials Sector has a period of seasonal strength in spring. Will the sector once again move higher and outperform the S&P 500 Index?
Background
The U.S. Materials sector consists of equities in the mines and metals, forest products, steel and chemical industries. Chemical stocks represent approximately 60 percent of the sector. Top weighted stocks in the sector include Alcoa, Dow Chemical, Dupont, Freeport McMoran Copper and Gold, Monsanto, Newmont, Nucor and International Paper.
Seasonal influences
Thackray’s 2010 Investor’s Guide notes that the U.S. Materials sector has a period of seasonal strength from January 29th to May 6th. The trade has been profitable in 16 of the past 20 periods. Average return per period was 8.0%. The sector outperformed the S&P 500 Index by 4.5% per period.
Strength can be attributed primarily to increasing prices and sales volumes. Demand for steel, lumber, base metals and chemicals increases during the February to May period when the spring construction season is in full swing.
Chart courtesy of Brooke Thackray
Technical influences
The S&P Materials Index currently has a mixed technical profile. Intermediate trend recently changed from up to neutral when the Index broke below support at 191.95. The Index also broke below its 50 day moving average at 199.70, but remains above its 200 day moving average at 177.56. Intermediate downside risk is to support at 175.03. Short term momentum indicators are trending lower from overbought levels. Stochastics already are short term oversold, but have yet to show technical signs of bottoming. Strength relative to the S&P 500 Index has been negative since the beginning of January, but showed possible signs of improvement last week during difficult equity market conditions.
Fundamental influences
Earnings prospects for the Materials sector in 2010 are exceptional. Demand for basic materials is expected to accelerate as spending from economic stimulus programs announced by the world’s largest nations last year starts to focus on infrastructure programs. Planning and engineering for infrastructure programs have been completed. The shovels for many of these programs go into the ground this spring. Prices of basic materials including copper, zinc, lumber, steel, iron ore and chemicals already are recovering from depressed 2009 levels and are poised to move higher.
Fourth quarter earnings reports released to date by companies in the sector have not helped. Earnings have been substantially lower than the same period last year, but in line or better than consensus estimates. Monsanto fell over 10% after its release and Freeport McMoran Copper &Gold dropped over 19 percent from its recent high. A preferred investment strategy is to wait until after fourth quarter reports for most companies in the sector have been released.
The Bottom Line
The seasonal trade in the sector is lining up nicely this year. A refined technical entry point has yet to appear, but likely will arrive shortly. Liquid ETFs in the sector are top candidates for purchase. They include Materials SPDRs (XLB), iShares U.S. Basic Materials Sector (IYM) and Materials VIPERs (VAW).
Disclaimer: Comments and opinions offered in this report are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.
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