Macro Wrap – Materials Sector Renaissance? $XLB

by Enis August 12, 2013 7:08 am • Commentary

The materials sector has been the worst performing sector in the U.S. market for much of 2013.  Stagnant metals prices, rising costs, weak emerging markets, and Chinese overcapacity have all been partly to blame.  The percentage performance of the major sector ETFs in 2013:

 

YTD ETF performance, in order, highest to lowest:  XLV, XLY, XLF, XLI, XLP, XLE, XLU, XLB, Courtesy of Bloomberg
YTD ETF performance, in order, highest to lowest: XLV, XLY, XLF, XLI, XLP, XLE, XLU, XLB, Courtesy of Bloomberg

From best to worst:  XLV (health care), XLY (cons. discretionary), XLF (financials), XLI (industrials), XLP (consumer staples), XLE (energy), XLU (utilities), and the worst performer, only up around 10% – XLB (materials).

Though the XLB is a bit of a potpourri ETF, with chemical companies, industrials suppliers, agricultural and metals companies, it is still a decent representation of the broad weakness in materials.  Materials companies have simply not been in favor.  After this week’s strength, however, XLB is actually the best performing sector ETF since the start of the third quarter:

Q3 performance, best to worst:  XLB,
Q3 ETF performance, in order, highest to lowest: XLB, XLV, XLI, XLY, XLE, XLF, XLP, XLU, Courtesy of Bloomberg

From best to worst:  XLB, XLV, XLI, XLY, XLE, XLF, XLP, XLU.  The materials sector really took the lead with its strong performance on Friday.  Given that recent relative strength, how does XLB look on its own technical merits?

The ETF is at a pivotal spot in the context of the last 4 years:

4 year daily chart of XLB, Courtesy of Bloomberg
4 year daily chart of XLB, Courtesy of Bloomberg

I’ve drawn the red resistance line around $41.75.  XLB has not been able to convincingly break above the 2011 highs so far in 2013, but it’s now at a make-or-break spot.  Given that this is a crucial technical spot, I’m surprised that implied volatility has not picked up more for XLB.  In fact, 30 day implied vol is near 2 year lows:

30 day implied vol of XLB, Courtesy of Bloomberg
30 day implied vol of XLB, Courtesy of Bloomberg

Realized volatility has been low since it’s been a quiet market for the past month.  But for XLB, it’s major decision time at that long-term resistance.  With that in mind, I think options structures here are cheap for XLB, whether you think it finally breaks out, or gets rejected once again.