Price Action & Performance
XLB has traced a nascent bullish reversal in July and now needs to take out horizontal resistance between $92.60 and $93.80 to confirm the positive inflection. Relative performance has improved as well, breaking a steep downtrend vs. the S&P 500 that began in January. Oscillator work has turned positive for the sector with the MACD registering a buy signal. Internal gages of intra-sector strength are turning positive with % of stocks above their 50-day moving average bouncing from a wash-out level of 17% to 4% over the course of July. 4 constituents made new 52-wk highs vs. the S&P 500 while there were 0 52-wk relative lows registered a positive in our model. The sector needs one more definitive up-thrust in the near term to confirm the bullish reversal.
Economic and Policy Drivers
On-shoring/Re-shoring has been a huge tailwind to construction materials stocks, and that trend has re-animated after taking a breather from March through June. Optimism for Metals & Mining stocks that manifested in the first half of the year has dissipated as economic data has softened and investors start looking to future Fed. policy easing as a potential salve for deteriorating economic conditions. YTD weakness in the sector became pervasive enough that lower expected rates is functioning as a near-term catalyst for the sector. This has taken upside momentum away from USD vs. global currencies which removes a headwind and may potentially replace it with a tailwind as the Fed. pivots its interest rate policy. That along with an expectation that a Trump presidency would ease regulatory burdens on the sector have provided a positive catalyst in the near-term. The twin themes of relief from lower rates and bullish policy catalysts from a potential Trump administration have revived the Value trade broadly vs. Growth. With that setup in place, we expect the Bloomberg Commodities Index to rally in the near term from deeply oversold levels and provide support for XLB exposure.
In Conclusion
We are seeing improved relative performance from XLB despite a historical headwind for the Sector from lower commodities prices. In our experience a sector that is improving despite visible macro headwinds is a Sector we want to start building a position in. With Commodities oversold at support, we think a tactical allocation to XLB is warranted. Our new Elev8 sector selection process starts August with an OVERWEIGHT allocation to the XLB of +1.74% vs. the S&P 500 Index.
Chart | XLB Technicals
- XLB 12-month, daily (200-day moving average | XLB Relative to SPX |14-day RSI | 12, 26, 9 MACD)
- XLB has moved above downtrend channel resistance on both price and relative curves. Looking for a move above horizontal resistance to confirm the nascent bullish reversal
Data sourced from Bloomberg
