Rotation into Materials is Imminent

Sector rotation is something we talk about a lot. This is a really important characteristic for bull markets and we can’t ignore it. So with Consumer Discretionaries and Financials sitting at or near their year-to-date highs, we turn our attention to some global growth areas.

Think about how strong the stock market has been without the participation in Energy and Basic Materials. Last Friday we discussed that it was Energy’s turn to make some moves. Today let’s talk Materials.

This chart shows the Materials Sector Fund ($XLB) consolidating sideways for two months. The correction comes after a 20% move in the sector in the two month period going into early February. The Head & Shoulders set up here is as clear as day. With the neckline just under 38 bucks, the resistance we’re watching is approaching quickly:

A resolution to this pattern should take the sector fund well above $40. But more importantly, the relative strength in materials could be about to turn up after two months of declines. Take a look at the $XLB:$SPY ratio at the bottom of the chart. The down trendline is breaking at the same time that the potential head & shoulders pattern is completed. Not a coincidence.

Sector rotation is key. And I think the Basic Materials space is one area that needs to get going if these equity averages are going higher.