Materials Run Into Historic Resistance

Many of the major US Stock Market sectors have already broken through their 2007/2008 highs. Healthcare, for example, is 60% above its 2007 all-time highs. Staples, Industrials and technology are all very much above those 2007 as well. Materials, however, are finally running into those highs now.

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First, here is a weekly bar chart showing the SPDR Materials Sector Index Fund $XLB running into all-time highs from 2008. After a historic crash followed by a recovery that was just as historic, the market has proven there is memory here. Last time we hit these levels, prices lost 60% over the next 10 months:

The next chart takes a closer look at the daily Japanese Candlesticks running into historic supply:

I can't buy Materials up here with a straight face unless prices prove they can breakout and hold above this resistance. We've see what some of these other sectors have done upon their breakouts (healthcare is a great example), but Material prices have yet to prove they can absorb all of this overhead supply. I think it's worth waiting for. Shorts, on the other hand, can use these levels as a stop. The risk/reward is definitely skewed in favor of the bears up here in the short-term.

The next chart shows the longer-term relative performance compared to the S&P500. 2008 support became support once again in 2012. But last year prices broke down to the lowest levels since 2006. Relatively speaking this is still a broken chart:

We can see that XLB/SPY has broken above this downtrend line from 2011, yet still below all of this broken support. If we start to see a breakout back above those lows, then we can make a solid argument for a relative overweight in the basic materials space.

There is a very high correlation between Materials and the S&P500. It's a much stronger relationship than most people might think. Over the past year, we see a +0.96 positive correlation with the S&P500. Short-term the relationship is solid as well: +0.94 over the past quarter and +0.96 over the past month.

It looks to me like the reaction up here in Materials could be followed by the S&P500. Du Pont, Monsanto and Dow Chemical represent about a third of this entire ETF. So we'll be watching closely.

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Tags: $XLB $SPY $DOW $DD $MON