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For the inflation crowd, metals are one of the most closely watched spaces in the market. However, recent weakness across several areas has given pause to this bullishness, but the relative performance of metals-related stocks could be signaling either continued strength or a pause in the downtrend, with steel and steel stocks exhibiting the most glaring divergence.

below is a preview of the Intermarket analysis report from Research by Potomac. 

The relative performance of asset classes is an area we give a lot of weight to, particularly in the sense that it can give investors an added degree of confirmation (or lack of confirmation) when analyzing the price action of various market categories. In this case, we are viewing the relative performance of mining & metals-related stocks to add or detract from the price action playing out in the supply and demand for their associated metals. The theory is simple; if stocks that are involved in the process of mining, refining, and selling metals begin to underperform or outperform, this price action can give investors evidence of the price action that’s playing out in the metal.

The Metals and Mining ETF (XME) has broken to the upside through $53 resistance after a breakdown in May’s selloff below a declining 50-day moving average. While the price action has been a positive development, bulls in the space will want to see the 50-day moving average taken out to the upside to having confidence this recent development is more than just a countertrend bounce. Relative to the S&P 500, the group has managed to recover the highlighted breakdown level to the upside. Again, bulls will want to see the ratio’s declining 50-day moving average taken out to the upside to having confidence that the trend of outperformance will continue.

Gold’s performance throughout the past year has left much to be desired. After breaking down through the $1,875 level early this month, the yellow metal has made a valiant but failed attempt to break through this level to the upside below a declining 50-day moving average. While the breakout above this level in the spring of this year was promising, the subsequent failure has given the gold bulls a reason to be concerned. After strong bout of relative strength by gold mining stocks relative to the S&P 500, relative performance has broken down through the highlighted zone and subsequently failed to break through the ratio’s declining 50-day moving average. Bulls in the space want to see this highlighted zone and the ratio’s 50-day moving average taken out to the upside to having confidence that the trend will resume. Until then, the onus is with the bulls.

After breaking down though the $21.50 level early this month, Silver has managed to recover this level to the upside below a declining 50-day moving average on a recent bout of strength. After months of flat performance, bulls in the space are beginning to wonder if a durable bottom could be in place at these levels but will want to see the 50-day moving average taken out to the upside. Note that over the past year, the 50-day moving average has provided a reasonable location of support and resistance, as well as trend direction, making this a key technical hurdle to overcome. Silver Miner’s performance relative to the S&P 500 has also managed to recover the highlighted zone to the upside after a false breakdown, but the ratio’s declining 50-day moving average will need to be taken out to the upside to have confidence that the recent action is more than a countertrend bounce.

Copper has bounced strongly after a test of $4.05 support early in the month after losing the 50-day moving average to the downside. Copper’s fall has given many investors reason to pause, as the cyclical metal is one of the most-watched gauges for risk appetite across asset classes. While the recent strength out of the $4.05 lows has supported the strength in stocks recently, retaking the declining 50-day moving average to the upside will go a long way in providing confidence that risk assets can maintain strength from these levels. The price action in Copper Mining stock’s performance relative to the S&P 500 has recently recovered the highlighted former breakdown zone to the upside, potentially signaling strength in the orange metal in the weeks ahead. Bulls will want to see this highlighted level hold to the upside, along with the ratio’s flat 50-day moving average taken out to the upside, to having confidence that Copper can make an attack on its own 50-day moving average.

Steel has sold off to retest the 1200 level below the declining 50-day moving average. This is an area that Steel has found support in the past and is being keenly watched by investors for further price action from this zone. Steel stock’s relative performance has broken out of the highlighted relative resistance zone above the ratio’s rising 50-day moving average. Could this development in steel stock’s relative performance be signaling strength to come for the commodity? It’s quite possible; however, the bulls in the space will want to see the 1200 level held in the commodity with the 50-day moving average taken out to the upside to having confidence that the trend in steel prices will reverse to the upside.

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Disclosure: This information is prepared for general information only and should not be considered as individual investment advice nor as a solicitation to buy or offer to sell any securities. This material does not constitute any representation as to the suitability or appropriateness of any investment advisory program or security. Please visit our FULL DISCLOSURE page.