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This sector is flashing a secret buy sign

Talking Numbers

The last three years may have been great for stocks overall, but there’s one sector that has been absolutely punished – metals and miners.

The ETF that tracks the S&P Metals and Mining Select Industry Index (XME) is down 40 percent since July2011 while the S&P 500 has rallied during that time frame. Three-quarters of the XME comprises steel, coal and consumable fuels, and diversified metals and mining.

While those industries have had a rough go the last few years, are the charts showing that things are about to get better for the sector?

(Read: Palladium climbs; gold up on fund inflows)

Ari Wald, head of technical analysis at Oppenheimer & Co. believes things are looking up for metals and miners. Using a top down approach, Wald said he selected the best industry in the best sector. That led him to the materials sector. Within that sector, “the industry that really stood out to us was metals and mining,” he said. “When looking at metals and mining versus the overall sector, what we like about it is that it’s been this huge underperformer over the past few years.”

Over the last two years, the XME has been flat while the XLB, the ETF tracking the S&P Materials Select Sector Index, is up 41 percent.

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Wald charted relative value of the XME to the XLB (that is, he divided the XME by the XLB and charted it). “More recently, it made a new relative low in March,” he said. “But, we’re seeing momentum actually trending higher since last year. What that’s telling us is that downside intensity is declining and this usually coincides with a meaningful turning point. To us, this is a buy signal.”

This also means metals and mining stocks are the next relative rotation idea, according Wald. This is “a strategy that’s worked very well in this bull market, where different sectors take turns being a leader,” he said. “It helps push the stocks ever more higher.”

Gina Sanchez, founder of Chantico Global, said the fundamentals agree with the technicals. She believes some of the metals bottomed out due to weakness in emerging markets. But, she sees things now turning around, particularly with copper. Earlier this year, Indonesia moved to limit copper concentrate exports to support its domestic smelters. In the last three months, copper prices have gained 7 percent.

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“The fundamentals have been weak,” said Sanchez, a “Talking Numbers” contributor. “But, we could start to see some bottoming and that could actually be quite supportive of this sector…. We have to wait and see what happens with the earnings results, but definitely there is some tightness in the market, and that’s always going to be good for prices.”

To see the full discussion on the metals and mining sector, with Wald on the technicals and Sanchez on the fundamentals, watch the above video.

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