3 Material Stocks to Avoid

03/23/2015 10:20 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

It was an impressive week for the stock market, though the materials sector still underperformed, so MoneyShow’s Tom Aspray takes a technical look at three material stocks to determine if they should be avoided despite the overall strong market.

It was an impressive week for the stock market with a 2.66% gain the S&P 500 while the Russell 2000 was even stronger as it was up 2.78%. The broadly based NYSE Composite was up 2.97% for the week.

The market internals were strong as the weekly NYSE A/D line made another new high last week confirming the positive intermediate-term trend. The weekly S&P 500, Nasdaq 100, and Russell 2000 A/D lines also made new highs. The volume analysis has improved but is still lagging the price action.

The recent correction did increase the negative market sentiment and there is plenty of economic data this week to move the markets. Keeping investors nervous about the economy and stock market helps build the wall of worry, which provides the environment needed to push stocks even higher.

One sector that underperformed last week was the Sector Select Material (XLB) as it was down 0.9% for the week. That was in contrast to the 4.6% gain in the Sector Select Health Care (XLV). This performance gap is consistent with market leading action of XLV basis the three phase relative performance analysis (Ultimate Stock Pickers Secret).

This analysis also indicates that these three material stocks should be avoided despite the overall strong market.

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Chart Analysis: The Sector Select Materials (XLB) broke out to the upside in February as the resistance, line a, was overcome.

  • XLB continued higher for another two weeks before reversing sharply to the downside.
  • This appears to have been a false breakout as XLB is now not far above monthly pivot support at $48.35 and the uptrend, line a.
  • The weekly starc- band is at $47.12.
  • The relative performance has dropped below its support, line c, aborting the bottom formation.
  • The RS line has also dropped below the early 2015 lows.
  • The weekly on-balance volume (OBV) formed a negative divergence at the recent highs, line d.
  • This divergence was confirmed by the drop below the recent lows.
  • The daily studies are negative but are oversold.
  • Initial resistance at $49.96 and the 20-day EMA.

Alcoa, Inc. (AA) is a 2.62% holding of XLB that appears to have completed a head and shoulder top formation three weeks ago with the close below neckline support (line e).

  • AA has continued to drop and closed last week below the monthly pivot support at $13.96.
  • The weekly starc- band is at $12.29 with further support in the $12 area.
  • The weekly relative performance violated strong support, line g, just a few weeks after the highs.
  • The RS line in early February was only able to move briefly above its declining WMA.
  • The RS has been plunging sharply over the past several weeks.
  • The weekly OBV did not confirm the price highs, line h.
  • The OBV dropped below important support, line i, six weeks ago.
  •  There is resistance now in the $14-$14.40 area.

Next: Two More Materials Stocks to Avoid

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Monsanto (MON) is a $55.9 billion dollar provider of agricultural products for farmers. It has a yield of 1.59% and is down 2.7% so far in 2015.

  • The close last week was just above the strong support, line a, in the $115.30 area and the quarterly pivot support at $115.60.
  • The weekly starc- band and further support is now at $112.38.
  • The relative performance dropped below its uptrend (line b) and its WMA one week after MON made its high.
  • The RS has been dropping sharply since it broke support.
  • The weekly OBV did not make a new high with prices in February.
  • It subsequently dropped below key support at line c, which confirmed the divergence.
  • The declining 20-week EMA is now at $118.48.

The Mosaic Company (MOS) is a $17 billion producer of phosphates and potash. It has a current yield of 2.15%.

  • The stock has dropped sharply over the past month as it is down almost 12%.
  • The weekly close two weeks ago was below the uptrend, line d.
  • The weekly starc- band was also tested last week with next good support in the $44-$45 area.
  • The relative performance turned positive in the middle of January just before the sharp six week rally.
  • The stock quickly rose 15% but now as dropped equally fast.
  • The RS line dropped below its WMA three weeks ago and has now violated support at line e.
  • The OBV is holding up better as while it has dropped, it is still barely above its WMA.
  • There is initial resistance at $47.72 and the 20-week EMA.

What it Means: Investors had warnings about the rapid upside and downside reversals in the relative performance analysis of XLB as the RS line did not have time to form a real downtrend after collapsing last September. A longer-term downtrend in the RS line is a key ingredient for the transition from a market laggard into a leader.

About the only positive for XLB is that it is reaching good weekly support. However, there are no signs that it is close to becoming a market leader and would stick with the market leading sectors and industry groups. These three stocks are getting oversold so a rebound is likely but it will probably fail.

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