Basic Materials has quietly been the most improved sector in DALI since the start of the year, but only a few areas within it present favorable pictures.
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Basic Materials has quietly been the most improved sector since the start of the year, gaining 61 signals in DALI, which is 36 more than the next closest sector (Energy). The group has seen a similar rise within Asset Class Group Scores, as it has increased its average fund score by 1.58 points, which is the largest increase among the 11 major sectors. Basic Materials is the most sensitive sector to changes in the US Dollar (DX/Y), as we highlighted in our US Dollar Study, so the greenback’s 10.7% drop in the first half of the year served as a tailwind for the space. However, with the dollar picking up slightly since then, the Materials Select Sector SPDR Fund (XLB) has fallen 3.3% over the last month while returning to a sell signal.
Despite the sector’s pickup in strength this year, it also has yet to break into firmly overweight territory, as the group ranks 6th in DALI while holding a below acceptable score of 2.99 in ACGS. Looking at XLB, things look even worse for the sector, with a fund score of 1.37 that has yet to move above 2.0 this year. Given that the sector has improved so much, how can a broader representative still be so weak?
While the sector has undeniably picked up relative strength, the increase has not come from all areas of the sector. Basic Materials are largely buoyed by the strength of metal-related companies while other areas of the sector have faltered. One way of evaluating the strength of subsectors is through the NDW Group Matrix, which ranks 40 groups in addition to the Equal Weight S&P 500 (SPXEWI). The three largest risers within the matrix since the start of the year are the Precious Metals, Non Ferrous Metals, and Steel groups. Precious and Non Ferrous metals have moved to the first and fourth matrix rank, respectively, while Steel is at 20th. Meanwhile, other areas within the sector have been a drag, with Forestry and Chemicals ranking bottom three in the matrix while both are down on the year. So, if you’re going to own Basic Materials exposure, your best bet is to focus on metal companies.
Gold miners have been one of the brightest areas this year, helped by the almost 30% gain in gold (GC/) YTD. The VanEck Gold Miners ETF (GDX) is having its strongest year ever, with its near 70% YTD gain being its best since the index’s inception in 1993. Over the last week, the fund rose another 11% and completed its third consecutive market RS buy signal. GDS also holds a near perfect fund score of 5.80, in addition to a positive score direction of 1.48, highlighting its strength so far this year. Recent movement has left the fund near extended positioning, so those looking to add could wait for some consolidation or pullback around $55 to $51.
