XLB, Holding Up...Sort Of

Published on Tuesday, 20 March 2012 20:14 Written by Todd Shriber

New York, March 20^th (TradersHuddle.com) – It has been said time and again that the risk on trade has been reborn in 2012, and that was true. For all of January and most of February, that is. While the broader market has continued to grind higher in recent weeks, high beta materials stocks haven’t impressed, at least not up to the standard they set through the first seven or eight weeks of the year.

The result has been some, shall we say, lethargic activity in the Materials Select Sector SPDR (NYSE: XLB). The Materials Select Sector SPDR is home to 32 stocks and serves an excellent barometer for measuring the intensity of risk appetite in the market. The ETF has shown tendencies to either be linked to U.S. economic data, similar news out of China or both. It might be the latter that has plagued the ETF in recent weeks.

The ETF was trading just under $34 in late December 2011 and was able to jump to some stiff resistance around $38 by early February. A healthy move to be sure, but XLB was stymied at $38, and while the fund is still holding above $37.

XLB is holding well above its 200-day moving average, but a couple of bad days could easily take the fund below its 20- and 50-day lines. A simple violation of support at $37 could put XLB in a position to retest some horizontal support at $35. Beyond that glum, technical outlook, investors and traders need to consider something else: In the past month, the S&P 500 has easily outpaced XLB. If that trend, persists, the obvious question, becomes what’s the reward in taking on XLB’s elevated risk profile? Answer: There is no reward.

Freeport McMoRan (NYSE: FCX), the largest U.S. copper miner, is public enemy number one for XLB at the moment. With a weight of almost 8.3%, the stock is XLB’s third largest holding. That’s not good news because, in the past month, shares of Freeport have plunged 11%. Newmont Mining (NYSE: NEM) is XLB’s fifth largest holding with a weight of just over 6% is even more of a problem. In the past month, that the stock has slid more than 12%.

With Monsanto (NYSE: MON), XLB’s second largest holding, also in the red since February 20, it’s easy to see why XLB is struggling. The slack performances by Freeport, Newmont and Monsanto, just to name a few, put an added burden on DuPont (NYSE: DD), which accounts for 11.3% of XLB’s weight, to pick up the slack.

In fairness, DuPont has been a steady performer, but that hasn’t been enough to snap XLB out of its recent doldrums. What XLB needs at the moment is for the world to become convinced that everything is alright in China or throw in the towel on China altogether and use XLB as a proxy for a recovering U.S. economy. Neither scenario seems likely in the near-term.