The Goldman Sachs Commodity Indexes (GSCI is the acronym) have been setting up bases lately and I have covered the commodities extensively on the Thursday March 19th webinar. The GSCI Index for Industrial Metals ($GYX) had a ballistic launch party.
I think it is important to set the back drop.
Japan is stimulating by $60 B / month
Eurozone is stimulating by $60 B/ month
China's premier announced a Whatever It Takes moment last weekend.
25 Central Banks have announced monetary easing since January 1.
The US Federal Reserve has removed the word patient from the Fed statement, but continues to wait before tightening monetary conditions.
This might just be the world's largest tailwind ever. Let's not forget that the last time 4 central banks eased monetary policy within a month of each other we had the surge off the October 2012 lows that was a massive upside move. This week, the advance decline line made new highs on the $NYA ahead of price which is getting very bullish. As a backdrop, I want to remain bullish.
Because the commodity chemicals companies within the materials sector in the US includes chemical companies like Dupont, Praxair, Airgas and Dow Chemical, the US version of the materials sector is vastly different than the Canadian version. That is not a bad thing, but it is important to understand the difference. That took me a while to learn. Let me illustrate my point.
Chart 1
OK, that wasn't hard to illustrate without annotations! It would be fair to say that anyone long the Canadian version of materials is not as happy as the US XLB investors. However, off the March 9th lows, the Canadian ETF is up 3.5%.
Chart 2
So, the main thing I am trying to point out here is that we have to be very specific in our materials sector discussion. I am talking about the Canadian version with hard goods that hurt when you drop them on your toe as Dennis Gartman suggests. Steel, Zinc, Copper, Gold, Silver stuff.
So now I am going to use the US GSCI Industrial Metals index ($GYX) to illustrate why I think the metals commodities are going to start to roll. First of all, it is starting to break out of the relative strength downtrend. Even with the $SPX rising 2.5% this week, the industrial metals are starting to outperform with a gain of 2.5% on Friday alone. We can see they broke above the down trend line roughly March 1. Considering the $USD has gone ballistic, look how tight the metals have traded for almost 3 months. Stuck in a channel between 300 and 315. I recognize Friday's action did not break above that channel. I think the $USD has made an intermediate top, which makes me want to look at beaten down names in the commodity space and this chart seems to be screaming asking for attention. You can see on the most recent low of Wednesday before the Fed meeting, the MACD was considerably higher than on the previous low so I like the positive divergence.
Chart 3
On the Webinar, I quickly rolled through some names that are just crushed. When a real company gets to 80% off the highs from three years ago, can it get worse? Absolutely, but we can also get a bounce of 100% in the stock in a few months. Some of the names moved between 5 and 10% on Friday alone.
So how can we find these?
From the home page, click on Sector summary (Below the mini chart in the top left).
Then click on the Materials Sector. With that we can drill down.
Lastly, click on the individual industry groups and check out the related groups.
For the Canadian investors, we can use the SCTR rankings. Sort on industry, then sector and scroll down to Materials.
For the record, I also picked out this group at the end of February, waiting for the $USD to turn. Well, it took some time, but a 5 cent move on the $USD looks like a change in intermediate trend for now.
Have a good week and good trading,
Greg Schnell, CMT
