foxex: Basic Shift

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Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Monday, July 20, 2020

1. Investors moving funds out of tech create opportunity

2. What do these companies have in common?

3. One impact of Fed policy

Market Moves

Stocks climbed higher today with the S&P 500 index (SPX) adding one-percent to its total. Meanwhile the Nasdaq 100 (NDX) exploded nearly three percent higher holding its highest close yet. Chart watchers may notice that the sector rotation taking place over the past four weeks left investors feeling as though big tech names were comparatively undervalued—especially compared to some Basic Materials sector companies. The chart below gives a bit of an indication why that perception might have taken hold.

If you compare State Street's sector-specific ETFs to its S&P 500 index fund (SPY), the three that come out on top are: Basic Materials (XLB), Consumer Discretionary (XLY), and Healthcare (XLV). The others remain below the benchmark during the past four weeks. Recently the Technology sector, which has occasionally lagged all other sectors except Energy during this time period, showed relative performance below all of these. Today's move seems to be a reaction to that, showing that investors still prefer to trust tech stocks. The strong upward move also indicates that buyers have not abandoned the opportunistic impulse that has characterized so much of the price action during the second quarter of the year.

What Do These Companies Have in Common?
Considering that the markets seem determined to go higher, it might be worth considering a closer look at the Basic Materials sector ETF (XLB). The chart below compares the top 10 holdings within this fund. The top three of these, Freeport McMoran (FCX), Linde PLC (LIN), and Air Products and Chemicals, Inc. (APD), are measurably outperforming the others over the past month.

It is interesting to analyze what these companies may have in common. Though they service different industry groups, they do have one common, not-so-obvious factor: China. Each of these companies has an extra measure of beneficial exposure to Chinese markets. It may be possible that this is a subtle indication of investors' expectations that China will be among the economies to recover most quickly from the pandemic.

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One Impact of Fed Policy

The stock leading the Basic Materials sector higher, Freeport McMoran (FCX), is a basic metals behemoth which owns some of the most valuable mining assets in the industry. This includes the Grasberg mine, which is the largest gold mine and the second largest copper mine in the world, located in Indonesia, giving it particularly useful logistics to all Asian markets. However, an added bonus for this company may come from the policy responses by the Federal Reserve and the U.S. government to the economic impact of the pandemic. The chart below shows how the price pattern for FCX shares appears to be breaking above its downward trend line just at the time the U.S. dollar index (DXY) seems poised to break lower. The inverse correlation between the two indicates that a lower trending greenback will be good for the share price of FCX.

The Bottom Line

Tech stocks surged today in what seems like a response to a previously rising preference for Basic Materials sector stocks. The stocks in the Basic Materials sector are doing well, but the stocks with strong ties to China markets seem to be doing better. This suggests that investors may be looking for the best ways to benefit from an economic recovery from the pandemic.