Materials have been beaten down for years, but they're finally starting to look attractive.
Almost every chart in the metals and mining space appears to be bottoming or starting to climb. Steel makers, for instance, have been moving sideways for the last six months after an 18-month slide. Coal producers are behaving similarly and starting to see some bullish call buying . Copper miners look even better.
These companies have been on the wrong side of the trade for the last year as the market priced in slow growth in China and then financial calamity in Europe. Both conditions are old news, but these stocks are still priced at panic levels.
One consideration is China, the world's second-largest economy. It will probably never return to the breakneck growth from a few years ago, but all the evidence points to re-acceleration in the last two months, with electricity consumption and industrial indexes starting to improve.
The situation is also slowly getting better in Europe with the Greek and Spanish debt crises seemingly contained. Key leaders, especially in Germany, have committed themselves to support Greece. Sadly the ailing country itself will probably end up blighted for decades like Detroit or Camden, N.J., but contagion is unlikely.
Then we have a budding positive in the U.S. housing market, which continues to show strength across the board. Whether you're looking at homebuilders such as Lennar or suppliers such as Louisiana-Pacific, these stocks have been moving. The same applies to less-followed companies, which include cement maker Texas Industries and gravel supplier Vulcan Materials.
Lumber is also telling an interesting tale. I like this commodity because it's a pure "use" commodity, with almost no speculation. It started falling in early 2005 as the housing market began to cool and continued dropping into 2008 even as gold, oil, and copper surged.
Interestingly, lumber prices have been rising since the summer as homebuilding rebounds, despite weakness in oil. Eventually that home construction will also filter through to prices for other materials, providing real demand rather than speculation. This is especially true for copper (and, by extension, emerging markets).
Speaking of the "red metal," that price chart is also bullish. Copper has been working higher for more than a year but remains at levels from late 2009. Given all we have been through since then, with China slowing and sovereign-debt panic sweeping the markets, copper looks especially strong. Producers such as Freeport-McMoRan and Southern Copper have also been making steadily higher lows. (FCX looks pretty interesting with today's drop.)
The "fiscal cliff" remains the big wild card, and there is no way to predict how or whether it will be resolved. But materials stocks might be safe regardless, because government spending is increasingly dedicated to simple transfer payments rather than fixed investment on things like highways. So if we do go off the cliff, the real pain would probably be felt by retailers and technology.
All of this points to the risk/reward in metals and materials looking definitely interesting here. Unless the world ends, it seems as if all the bad news is priced in--and the tide is turning.
Disclosure: I am long FCX.
(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Dec. 5.)
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