Sunday, July 06, 2008

Message From the Materials Sector?


It was difficult to not notice the swoon in the coal sector (KOL; pink line above) this past week, even as materials stocks have been in steady retreat (XLB; blue line).

Wasn't it just in May that the materials sector was making bull market highs, rising more than 50% from its 2006 lows? Back in May, we saw over 85% of materials stocks trading above their 50-day moving averages. At present, that is down to 7%. Over 70% of the sector's issues were trading above their 200-day moving averages since May; now only 21% are above that benchmark. That's quite a retreat.

Notably, the advance-decline line specific to the XLB stocks has moved from a bull market highs in May to 15+ month lows at present.

Back in May, voracious growth in the emerging economies was the story behind the commodities-linked materials stocks. Now, with stock markets in India and China in hasty retreat, markets may be pricing in the effects of a global recession.

This shift from an emerging markets growth story to a truly global recession theme has important implications for commodities markets as well as rates and equities. Inflation has been making the headlines, fanning concerns over central bank rate hikes, but falling materials shares may be foretelling a very different economic future.
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3 comments:

Damian said...

I'm not sure I agree - look at copper - breaking out to new highs.

Brett Steenbarger, Ph.D. said...

Hi Damian,

Good point. It looks like late bull market action to me, with increasingly selective participation to the upside--

Brett

Damian said...

What I see is the stocks associated with commodities are breaking down, but the commodities themselves are going higher - Gold, Silver, Aluminum, Copper - all trending higher.