ETF Insights| October 1, 2024
With commodities prices moving higher we have switched from a negative to a cautiously optimistic view on the sector.
Price Action & Performance
XLB made a multi-month price high for the 3rd consecutive month in September and is showing signs of technical bullish reversal over the intermediate term both from a price and performance perspective. The oscillator work has improved as well with the MACD on a buy signal and the RSI study just shy of overbought levels. While overbought conditions aren’t always the best entry points, they are a positive development for any instrument that has been in a downtrend as they are a necessary fact of bullish trend change.
At the industry level Chemicals, Containers & Packaging and Metals & Mining stocks in aggregate have each outperformed the S&P 500 over the past 3-months while Construction Materials stocks have stabilized. The sector itself posted a +4% excess return vs. the benchmark.
At the stock level we have seen steady improvement month over month with more buy rated single stock charts emerging, particularly among the larger Chemicals names. Our favorite stocks within the sector from a technical perspective are LIN, SHW, ECL, DD and PKG.
Economic and Policy Drivers
XLB has gotten a boost from the near-term rise in commodities prices as measure by the Bloomberg Commodities Index. XLB performance is highly correlated to the direction of Commodities prices, and dovish policy implementation has started to spur positioning in commodities inputs and Materials sector stocks.
On-shoring/Re-shoring has been a huge tailwind to construction materials stocks, but performance has been consolidating over the intermediate-term leading us to conclude that the bullish re-rating in those stocks has likely been priced in. QE now offers a path towards a re-acceleration of economic activity, but there is now a potential cross current from near-term contractionary data readings. It will be interesting to see how close the Fed is to actually threading the policy needle in a constructive way.
The outcome of the US election would likely have some impact on the Materials Sector’s prospects as Former President Trump’s import tariffs in 2017 benefitted US producers but raised costs for consumers. Trump also enacted the Tax Cuts and Jobs Act of 2017 which allowed businesses to immediately expense 100% of the cost of eligible properties, which is a potential boon for capital intensive industries within the sector. Trade agreements like the tri-lateral USMCA will be worth watching as well.
So far, the Federal Reserve’s interest rate policy has led to positive outcomes for the XLB as its performance has improved since June. We remain somewhat skeptical that commodities adjacent sectors will take a leadership role, but we are seeing some constructive signs from XLB and XLI. We also note that min vol. sectors reached overbought levels ahead of the Fed’s policy announcement in September and we are fading strength there in the near-term. The result is a modest bullish allocation to XLB.
In Conclusion
We prefer XLB to XLE and start October with a cautious buy in to the Materials Sector’s nascent bullish reversal. Our new Elev8 sector selection process starts October with a +0.63% allocation to XLB 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 shown enough signs of technical bullish reversal to have us more constructive in Octoer
XLB Relative Strength vs. S&P 500: Sector and Industry Level | Trailing 3-months
XLB Street Analyst Ratings and Price Targets:
Data sourced from FactSet
