(Premium) Materials Sector Deep Dive – August

The Materials sector is the second smallest of all the 11 sectors in the S&P 500 index. At just a 2.5% weighting, it’s worth less than each Apple, Amazon, Microsoft, NVIDIA, and Alphabet.

It’s tough to spend much time delving deeply into a group with so few constituents – especially when most are underperforming. Check out the equally weighted Materials sector compared the the equally weighted S&P 500. The ratio is stuck in a technical downtrend beneath last year’s lows.

Linde, the juggernaut of the Materials sector, keeps setting new highs. Comprising more than a quarter of the sector’s market cap, that’s propped up the price cap weighted sector index. Linde has moved steadily higher since breaking out above its January 2022 peak, a level that’s also the 261.8% Fibonacci retracement from the 2020 selloff. We’ve had a long-term target up near $470, which is the 423.6% retracement from that decline.

We see no reason to change that as long as LIN is above $350.

The aggregates companies are constructive, as well. Martin Marietta is consolidating above its former all-time highs, the 2022 peak at $450. Our target for MLM is $520, which is the 261.8% retracement from the COVID decline.

We love a stock that’s showing strength on both an absolute and a relative basis, and that’s exactly what we’ve got with MLM. Here it is at multi-year highs vs. the S&P 500.

Peer Vulcan Materials recently broke out, too, finally getting past the 161.8% retracement from the 2019-2020 selloff. Now we think it can go all the way to $300.

Elsewhere, we’re eyeing some potential breakouts that could make us reassess our lukewarm feelings for the sector. Nucor is testing resistance from last year’s peak. Last time, the stock was here, it dropped all the way back to the 38.2% retracement from the 2022 trading range. On a breakout, though, we want to be long with a target near $220.

Celanese is working towards establishing a new uptrend after spending the last year stuck below resistance at $130. It’s a no touch while prices are still below that level, but the risk is well-defined on a breakout, with a target of $160.

Ball Corp is the same way. If prices are below $62, then we need to treat it as a consolidation within a longer-term downtrend. If we’re above $62, though, the higher probability is that we’ve got a new uptrend on our hands, and we can own it with a target of $80.

Newmont isn’t trying to enter a new uptrend. It’s setting new lows.

We could get another failed breakdown here like we did last fall, and that could spark another mean reversion rally. But if NEM is below $40 we can’t approach it from the long-side.

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