Friday, October 12, 2007

Will Basic Materials Continue to Lead the Market?

From Bloomberg:

Stocks in Europe and Asia fell, led by mining companies after Citigroup Inc. lowered its recommendation for the industry saying it was ``surprised'' by the shares' two-month rally. U.S. index futures also declined.

BHP Billiton Ltd., the world's largest mining company, and Rio Tinto Group paced the retreat. Alcatel-Lucent SA and Nokia Oyj sank following a sell-off in U.S. technology companies. Sony Corp. led Asian shares lower after the company's mobile-phone unit reported the first profit drop in two years.


``Some of the mining stocks have had huge moves up from their lows during the credit crisis,'' said Job Curtis, who helps manage about $2.2 billion at Henderson Global Investors in London ``I am a bit cautious. You can't forget that this is a cyclical sector and, at some point, we are going to see a downturn.''

Basic materials are benefiting from huge global demand. Many countries (especially China and India) are literally gobbling up raw materials. I seriously doubt this is going to change in the near future -- or distant future. Both countries seem determined to grow a high rates.

However, markets rise and fall. This is a natural process. Traders take profits.

The basic materials ETF is one of the top performing ETFs for the year. However, all things come to an end.

Notice the following on the above chart.

1.) The uptrend is still very much intact. The index would have to lose about 10% before it comes close to testing long-term support.

2.) All the moving averages are moving up and the shorter moving averages are higher than the longer moving averages.

3.) Prices are above the moving averages.

4.) There is decreasing volume on the latest upward move.

5.) Like the SPYs, the XLB chart could be forming a double top.