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Chart of the Day: Materials in Serious Danger

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The incremental data points coming out of China point to continued slowing in the commodities complex globally.

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My firm had a brief argument yesterday on CNBC's Halftime Report about whether stocks in the materials sector were cheap or not. Certainly, many mining-related stocks have been battered in the past few months, particularly the gold miners. But putting aside the precious metals, what about the other materials names, like industrial miners, chemicals, and fertilizer stocks?

XLB is the ETF that tracks the large-cap materials sector that includes such names. There is a strong weighting of chemicals stocks, not just miners. Despite that diversity, the ETF had closely tracked copper prices for most of 2010, 2011, and 2012. Here is the three-year chart of XLB (in orange) vs. the second month copper futures contract (black):


Three-year chart of XLB vs. HG2 futures, Courtesy of Bloomberg

The two quite closely tracked each other up until the last six months. In the past six months, copper has stagnated, while XLB has followed the broader market higher. This divergence is especially noteworthy since everyone seems to attribute the recent equity rally to increased central bank easing globally. However, in previous liquidity-driven rallies over the past three years, commodities participated in a similar manner to stocks. That's what sets the most recent period apart.

So will copper catch up to XLB, or will XLB drop down to copper? The incremental data points coming out of China (both the property restrictions as well as the generally weak manufacturing data) point to continued slowing in the commodities complex globally. China accounts for 50% or more of global demand for many different industrial commodities. In that context, if Chinese weakness is not a short-term blip, then copper is giving the more reliable signal.

This item by Enis Taner was originally published on RiskReversal.com.

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No positions in stocks mentioned.
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