Materials make a double-edged sword

So if we’re in the midst of a global recession and there is all this talk of less demand for materials worldwide, why has the materials sector rose so much in the last 2 months?

The total market value of the materials index in Canada is a little more than $1.6 trillion. This currently represents about 25% of the TSX Composite index. Some of the companies that make up the materials index include Agnico-Eagle Mines (AEM), Agrium (AGU), Barrick Gold (ABX), Canfor Corp (CFP), Goldcorp (G), Harry Winston Diamond (HW), Potash (POT), Methanex (MX), Silver Wheaton (SLW), Teck Caminco (TCK.B) and Labrador Iron ore Fund (LIF.un)

The S&P/TSX materials index closed on Friday January 23, 2009 at $253.34. The high over the last year was $426.23 and the low was $157.13. Since the low on October 24, 2008 the materials index has rallied over 40%. In comparison, the S&P/TSX composite in Canada is down -7% and the S&P 500 is down -5%.

Technically, the materials sector has been bullish. Since the low on October 24, 2008 a positive rising channel has formed suggesting strong momentum with the lows and highs rising. In addition, on Dec 8, 2008 the current price crossed the 50day moving average.

Last month I wrote that Gold is starting to shine and to watch it because it was exhibiting both fundamental and technically positive indicators. Barrick just became the largest company in terms of market capitalization on the S&P/TSX over taking Royal Bank of Canada and EnCana Corp. Since the October 24, 2008 low, the Gold sector is up over 80%. That goes along way to explaining why materials have been up over 40%. Also, it tells us something about the rest of the materials sector if gold companies represent a large share of the index.

The rest of the materials sector isn’t shining like gold. That doesn’t mean it won’t shine. One thing in the Materials sectors favour is the seasonal effect which tends to take hold from now until May where materials tend to rise. The other positive is the induction of Barrack Obama and the hope that the US economic stimulus will offset earnings concerns moving forward. The barriers of a global recession and continued earnings reports that are worsening still stand. Global demand has put a real damper on the demand for materials, with the exception of gold lately. The one thing that drives it up is caused by the one thing that drives the rest of the sector down. It appears to be a double-edged sword for materials, so choose your weapon carefully.