Price Action & Performance
XLB underperformed the S&P 500 by -10% through January but has turned it around since then. Price action and sector internal strength profiles suggest this is a good accumulation point for the XLB. Price is bouncing adroitly from near-term oversold levels and the sector is typically an inflation beneficiary. 3 of the 4 industries comprising the sector are showing technical bullish reversal on price at present with only the Chemicals industry a laggard. Construction materials Co’s VMC and MLM have been very strong stocks in 2024 and we are seeing a strong near-term bounce in the relative performance of Miners in both base metals mining Co’s (FCX, SCCO) and Precious (NEM)
Economic and Policy Drivers
Gold was an early signal on inflation with NEM the only precious metal exposure in the S&P 500. Similar to Energy stocks, the Materials sector historically benefits from rising commodities prices. CPI prints over the next several months will be the most important events for the sector as continued higher inflation would likely spur investors to position for rising commodities prices. Input prices have been rising in the near-term but have been weak over longer timer frames which creates some upside opportunity for XLB.
How Can XLB Help?
XLB offers an attractive exposure if during expansionary cycles where commodities prices are rising. In the last 2 months that scenario has been taking shape. 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).
In Conclusion
When inflation is top of mind, XLB should be near market weight at a minimum. This allocation is recommended over a tactical time frame until there is a clearer picture of the longer-term inflation trend, but at present the technical and macro back-drops support XLB outperformance. I recommend a modest OW (+25 – +100bps) in XLB for May at this time.
Chart | XLB Technicals
- In absolute terms, XLB price has broken out above long-term resistance at the $86 level. Price action projects an intermediate-term target of $98
- Near-term internals are washed out and dovetail with the oversold condition on the daily RSI, implying a solid entry point at near-term oversold levels
