XLB has fallen to new lows without any signs of positive divergence.
Price Action & Performance
XLB price is at intermediate-term support on the chart with a move below $87 interpreted as an intermediate-term technical sell signal. The XLB is currently oversold on a near-term basis, but there are no buy signals showing up in the oscillator work and no positive divergences developing either. The Bloomberg Commodities Index is our macro price signal for XLB exposure, and it is also oversold and exhibiting clear weakness. Reversals can still happen in this kind of setup, but we don’t have any evidence that they are increasingly likely from our process. Industries within the sector have been uniformly challenged in the near-term with the Construction Materials co.’s (VMC, MLM) finally joining the rest of the sector in rolling over to the downside at the end of May. More concerning is the continued and pervasive weakness from the Chemicals Industry which is the largest basket of stocks in the sector.
Economic and Policy Drivers
On-shoring/Re-shoring has been a huge tailwind to construction materials stocks, but that trend has finally taken a breather turning an area of strength within the sector into a contributor to weakness. 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 has become pervasive enough that the salubrious effect of lower expected rates may function as a near-term catalyst for the sector contrary to the historical relationship. However, USD strength has potential to become a negative headwind for the XLB as continuing ex-US weakness potentially bolsters the interest rate differential positively between US and the rest of the world. There will likely be a tricky pivot to navigate moving forward, as we expect economic improvement to come with more conviction on the Fed.’s forward policy plans. More conviction on lower rates would likely spur the sector higher in the near-term despite their historical negative correlation to each other.
How Can XLB Help?
XLB offers an attractive exposure during expansionary cycles where commodities prices are rising. That scenario remains on the table despite the recent correction in the sector and in commodities prices. If inflation stays elevated, but not high enough to tip the economy into recession the XLB is likely to outperform given its high exposure to businesses that benefit when input costs rise and operating Co’s gain pricing power due to scarcity. On the flip side, if inflation pressures subside in a benign manner, strong trends in homebuilding, infrastructure build-out and AI could benefit the XLB as they reflect steady demand for copper (FCX, SCCO), Lithium (ALB) and Construction Materials (VMC, MLM). We are also seeing a potential bottoming out in the Chemicals industry and XLB offers exposure to capitalize on that nascent turn-around. At present, macro level price trends are headwinds to the sector and relative strength reflects that, but as we detail in our trading notes, the Sector SPDR’s and other similar vehicles offer an attractive and affordable way to manage exposure in the event of a sudden change in fortune.
In Conclusion
Inflation did not bite in June, nor is it far enough away from being a concern. The Chemicals Industry, which is the largest in the sector confirmed weakness last month with stallwarts LIN and APD losing their luster, and the trend in Construction Materials finally corrected. Containers & Packaging and Mining failed below bullish break-out levels and are now challenging support to the downside. Our new Elev8 sector selection process starts July with a 0% weight in the sector. We were disappointed the lack of follow through from the Q1’s potential bullish reversal.
Chart | XLB Technicals
- XLB 12-month, daily (200-day moving average | Relative to SPX)
- XLB has made a new 52-wk relative-low and the only thing that can be said about the chart is it is potentially so bad it might invite contrarian speculation.
- Weak summer seasonals are often a catalyst for laggard parts of the market to make up ground, but that hasn’t been the case in 2024 and historically August is the only month where that factor is strong enough to materially impact our models in a favorable way for the sector
Data sourced from Bloomberg
