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The former sector leader has reversed course and turned into a laggard after breaking through the key levels to the downside that defined the former outperformer. Former industry group leaders are now laggards, and former laggards are not eyeing leadership. Breadth in the space is recovering from washed-out levels, and this development combined with the oversold distance from the index and its 50-day moving average could provide the foundation for a countertrend rally.

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S&P 500 Materials 

The Materials sector continues to grind lower, testing short-term resistance at the 460 level below a declining 50-day moving average. Note that the distance between price and the 50-day moving average is the largest it’s been all year and could leave the door open for an oversold rally. Relative to the S&P 500, the group continues to falter, breaking long-term support at the highlighted zone below the ratio’s declining 50-day moving average.

Chemicals have broken support at the 755 level and the March lows after multiple failed attempts to close below this zone last month. Much like its sector peer, the price action takes place below a declining 50-day moving average. Relative to Materials, the group remains an outperformer as it trades above the highlighted relative breakout zone and the ratio’s rising 50-day moving average.

Metals and Mining have found support at the Q4 lows of last year at the 190 zone after a strong selloff. While the price action on an absolute basis is encouraging, relative performance leaves much to be desired. Relative to Materials, the group trades below broken relative support at the highlighted zone below the ratio’s declining 50-day moving average.

After breaking down below the 295 level last month, Containers and Packaging have made several rally attempts from the recent lows, with its sights set on the highlighted breakdown level below the declining 50-day moving average. Relative to Materials, the group has posted strong recent outperformance, but bulls want to see the highlighted zone at the Q1 relative highs broken out to the upside to have confidence in the outperformance.

Construction Materials have rallied to test resistance near the 300 level below the declining 50-day moving average in yesterday’s trading session. Should the industry group break through this zone to the upside, it would be a step in the right direction for early bullish improvement. Relative to Materials, the group has broken out of relative resistance to the upside, and above the ratio’s declining 50-day moving average for the first time since March of this year.

Breadth

The percentage of Materials components trading above their 20-day moving averages crossed above the 20% mark in yesterday’s trading session after printing very low values throughout June and this month. There were 223 instances since 2000 where the percentage of Materials components trading above their 20-day moving average crossed above the 20% mark for a median gain in the sector of 3.53% with a 64.25%-win rate over the following quarter. It’s worth noting that median gains have tended to peak 61 trading days out at 4.06% on a slightly improved 65.61%-win rate, so consideration should be given to hold times.

This note is a preview of our Thursday Sector Deep Dive. See our thoughts and more in the full report.

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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.