Materials Break Out

Alfonso Depablos, CMT
March 28, 2024

From the Desk of Alfonso Depablos @Alfcharts

A major theme we've witnessed in recent weeks is a shift in leadership as sector rotation continues to spread across the US equity market.

One could argue it is more a general broadening of the rally than it is rotation.

Regardless, one of the major beneficiaries has been Materials.

With commodity markets getting back in gear, industry groups from copper and steel to agricultural inputs are showing strength again.

With broad participation beneath the surface, this is a group we want to be adding long exposure too in the coming days and weeks.

Take a look at the Large-Cap Materials SPDR Sector $XLB:

Price has been rising in a nearly vertical line for nine consecutive weeks, reaching a critical resistance level at the prior-cycle highs.

While this is a logical place to digest some gains, if and when we get a decisive breakout from this base, we should get ready for a new leg higher.

After all, small and mid-cap materials have already registered resolutions from similar consolidation patterns.

Here’s the S&P 400 and S&P 600 Materials Indexes:

We want to make the bet that the S&P 500 Materials Index follows the same path soon.

As for the relative trend, it has accelerated higher in recent weeks.

The XLB/SPY ratio violated a critical support level and reached multi-year lows two months ago.

However, buyers stepped in right away and successfully repaired the damage, resulting in a textbook failed breakdown.

We think this counter-trend reaction has legs. We’re looking for XLB/SPY to head back toward the upper bounds of this range over the coming months.

This kind of action on a relative basis is solid support for the bullish price action we’re seeing in the absolute charts. In other words, we think the new highs in XLB are likely to stick.

Long story short, materials stocks are breaking out in a big way and reasserting themselves as a leadership area.

We want to be buying more and more of these names in the future.

Do you? Shoot us a note and let us know.

Alfonso

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