Basic Materials On the Move
Heading into trading on Wednesday, many of the biggest edges in exchange-traded funds can be found in one sector: basic materials.
The iShares Dow Jones U.S. Basic Materials Index Fund ETF (NYSE: IYM) and the Materials Select Sector SPDRS ETF (NYSE: XLB) have both closed lower for two out of the past three trading days. IYM has finished the last three sessions in technically oversold territory (XLB, two of three oversold), and of the two was down more on Tuesday, pulling back by just over one and a half percent while the sell-off in XLB took that ETF lower by closer to one and a quarter percent.
What is notable about the current pullbacks in these ETFs is that they are the first corrections since both funds climbed back into bull market territory in mid-to-late January. Prior to Tuesday, neither fund had made a significant, short-term low since the middle of December. But as traders take profits in the wake of the highest prices in both IYM and XLB since August 2011, new, short-term lows have emerged, potentially tempting active investors back into the market on the buying side.
Of the two, the larger, short-term edges are in the iShares Dow Jones U.S. Basic Materials Index Fund, which has a positive edge of three-quarters of a percent. The short-term edge in the Materials Select Sector SPDRS ETF is half a percent. Both exchange-traded funds have earned “consider buying” ratings of 9 out of 10.
Some of the stocks driving these oversold conditions, top ratings and new, short-term lows are stocks like Dow Chemical (NYSE: DOW) and DuPont (NYSE: DD). Both major industrial chemical companies are trading above their 200-day moving averages, but have begun to pullback in recent days. The selling in DuPont has been especially intense, with the stock falling for three days in a row including a Tuesday loss of well over one and a half percent. Shares of DD earned “consider buying” ratings of 8 out of 10 midway through Tuesday’s session, and have a positive, short-term edge of nearly 1%.
In addition to chemical stocks, steel companies such as Nucor Corp (NYSE: NUE) have also spent the past few sessions in pullback mode. NUE has closed lower for three days in a row, and shares of the stock are now oversold above the 200-day moving average. NUE has a sizable positive edge in the short-term of more than one and three-quarters of a percent, and a “consider buying” rating of 8 out of 10.
Coming Spring 2012: the second edition of How Markets Really Work: A Quantitative Guide to Stock Market Behavior by Larry Connors and Cesar Alvarez. Click here to learn more.
David Penn is Editor in Chief of TradingMarkets.com