Sector Deep Dive - 12/20/2023
Top charts and trade ideas from the Materials sector
The S&P 500 Materials sector was the best place to be in the first few months following last October’s bear market bottom, but it’s been nearly a year since the sector has done anything at all. Since the end of January, the sector has climbed just 1%, while the S&P 500 has risen 17% over the same period.
Yesterday, the Materials barely set new 52-week closing highs, but there’s still plenty of work to do before the group challenges the peaks from February 2022.
There are still 6 trading days left in the year to complete the breakout, but new highs in January 2024 will be harder to come by. January is historically among the worst months of the year for the sector, with negative price action more than half of the time over the last 30 years.
Beneath the surface, things aren’t much more compelling. The equally weighted Materials sector is in the lagging quadrant of the weekly Relative Rotation Graph, and it hasn’t graced the leading quadrant in nearly a year.
Before you completely ignore the Materials, though, check out the small caps. They’re painting quite a different picture as they attempt to set not just new 52-week highs, but new all-time highs. If PSCM is above $73, which is the 161.8% retracement from the 2018-2020 decline, we definitely don’t want to be betting against it. We’d rather be long with a target of $100, which is the next key Fibonacci retracement level.
And when we look at the small cap space as a whole, the Materials are threatening to step into the leading quadrant of the RRG. In other words, the small cap materials aren’t just rising, they’re also showing relative strength.
Why such a difference between the large cap and the small cap sector? It’s all about composition. Nearly 70% of the S&P 500 Materials sector is comprised by the Chemicals industry, and just 16% by Metals & mining. The small caps? They’re nearly 40% Metals & Mining stocks. And the Metals & Mining stocks are the ones leading the sector higher these days. Check out XME, which has jumped 20% since mid-November and is at its highest level since April 2022.
So if we’re looking for stocks to buy in the Materials space, that’s where we want to focus most of our attention.