XLB Materials SPDR June Outlook—We like the outlook for XLB better than that of XLE in June against a mixed backdrop for commodities prices.
Price Action & Performance
XLB consolidated in May and looks buyable here. The Chemicals Industry has been an overhang for the sector, but at the stock level there is some near-term improvement in names like ECL and DD while LIN is at near-term support and ALB is at long-term structural support along with several Fertilizer names like CF, FMC and NTR. Construction Materials co.’s MLM and VMC continue to be standouts in the sector and miners have seen charts improve throughout May. Containers and Packaging stocks have shown some near-term strength despite a backdrop of structural weakness from 2017-2022. Some of the stock level optimism is balanced out by weak long-term price structures for the Crude and broad commodities index charts. We think the latter is stronger than the former, so we are opting for an XLB allocation and leaving out XLE in the monthly model.
Economic and Policy Drivers
On-shoring/Re-shoring has been a huge tailwind to construction materials stocks. That has been the leading industry withing the sector since the beginning of 2023. News on OPEC coming through with potential supply cuts may be driving marginal improvement in Chemicals stocks, though the Crude chart is still projecting weakness. Inflation and Fed. policy will still be an important driver for the sector. A Fed. move towards a more dovish interest rate policy would likely lift all boats, but in the meantime, there is some potential for rotation into laggard sectors like XLB. If commodities regain their bid, and equities rotate towards Value with XLB would likely benefit according to our historical studies.
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. In addition, the XLB is at a buyable level amidst recent consolidation.
In Conclusion
Inflation did not bite in May, nor is it far enough away from being a concern. The Chemicals Industry which is the largest in the sector looks like a potential turn-around, and the trend in Construction Materials remain strong. Containers & Packaging and Mining have improved in the near-term as well. Our new Elev8 sector selection process starts June with an overweight in XLB of 1.68% vs. the sector weight in the S&P 500. We are not quite as sanguine on XLB as that rating suggests as we are naked the Energy sector in our model and hoping a modest overweight in XLB will hedge us in case we are wrong on the direction of Crude and Energy equity prices in June. Nonetheless we prefer the fundamental story lines and the technical characteristics of the Materials Sector vs. Energy this month.
Chart | XLB Technicals
- XLB 12-month, daily (200-day m.a.|14-day RSI|12,26,9 MACD|Relative to SPX)
- XLB continues to consolidate February/March gains as the nascent bullish reversal tries to find its footing again
- Weak summer seasonals are often a catalyst for laggard parts of the market to make up ground and we think that could be the case in 2024.
Data sourced from Bloomberg
