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Despite the sideways choppy price action that has defined the sector all year long, the real action in the space is under the surface, outperforming the S&P 500 since the spring of this year. Breadth in the space has received a noteworthy boost in strength in yesterday’s trading session, potentially providing fuel to power the sector’s continued outperformance.

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S&P 500 Materials 

Materials continue to chop and consolidate around the flat 50-day moving average, continuing the pattern of sloppy price action that has defined the space for a year. However, it’s the action under the surface that has captured investors’ attention. Relative to the S&P 500, the group continues to outperform as the ratio traded in a rising channel above the rising 50-day moving average that’s defined the uptrend since the spring of this year.

After recapturing the rising 50-day moving average to the upside, Chemicals have found support once again at the 50-day moving average and the 860 zone. Relative to Materials, the group has recovered almost all the relative ground lost in the first four months of the year as the ratio tests long-term relative resistance above the ratio’s rising 50-day moving average. Bulls in the space want to see this zone cleared to the upside to have confidence that the trend in outperformance will continue.

After a strong selloff in April and into May, Metals & Mining have managed to recapture the Q1 breakout level at 245 to the upside in yesterday’s trading session. Bears will posit that the price action is countertrend in nature below a declining 50-day moving average, while bulls will cite early signs of strength in recapturing the breakout level. Relative to Materials, the group is testing relative resistance below the ratio’s declining 50-day moving average with a higher relative low over the last few trading sessions.

Continuing the slow and steady downtrend that’s defined the space for a year, Containers and Packaging have sold off after finding resistance at the declining 50-day moving average after a rally attempt from support at the 299 zone late last month. Relative to Materials, the group continues to trade in a relative compression on a series of lower relative highs from the end of last year around the ratio’s declining 50-day moving average. Bulls are encouraged to see the highlighted relative support zone hold but will want to see an upside breakout above the downtrend line to have confidence that the trend of underperformance could be reversing.

Construction Materials have lost the rally attempt at the 335 zone to the downside after slicing through this long-term zone of polarity over the past two trading sessions below the declining 50-day moving average. Relative to Materials, the price action is much of the same, continuing the downtrend of underperformance below the ratio’s declining 50-day moving average.

Breadth

The percentage of Materials components outperforming the sector received a boost in yesterday’s trading session, crossing above 2 standard deviations of one-year readings. There were 77 instances since 1997 where the percentage of Materials components outperforming the sector crossed above the 2 standard deviation mark for a median gain in the sector of 2.76%, with a 67.57%-win rate over the following quarter. It’s worth noting that median gains have tended to peak 53 trading days out at 3.63% on a slightly reduced 66.22%-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.