Materials sector less bullish for Canadian investors

The global materials stocks have, on average, been ripping since 2016. You can see the sharp, tight uptrend on this chart of the iShares Global Materials ETF (MXI-US).

Led by the big US firms, the US materials sector, via the iShares US Materials ETF (IYM-US) has a similar look to the chart. Tight and to the right!

The picture changes dramatically for the Canadian materials sector. Take a look at the iShares Canadian materials ETF (XMA-T). This sector ETF has been sideways while the broader global materials sector has been on fire. Yes, it may be moving within a triangle pattern that shows some signs of breaking out, but that triangle break must last a little longer to be considered bullish. I’m wondering if this breakout is sustainable.

That’s because the Canadian materials sector has a 45% influence via gold stocks (!!), followed by 16% in fertilizers and related agriculture materials stocks. Compare that massive weighting in two industries to the much more “true to form” global ETF. Its holding less than 3% in gold. The global ETF is mostly weighted in chemicals and industrial mining. Further, the individual stock weightings are diversified better than the Canadian index. Dow DuPont is the biggest weighting in the global ETF at just under 8%, with the majority of holdings in the 2% or less range per stock.

The Canadian counterpart has over 8% in Potash, along with more than 7% each in Agrium, Barrick and Franco Nevada. The charts for those stocks (not shown) are suggesting a downtrend for Barrick, a base for Potash, and some serious near termed resistance points for Agrium and Franco Nevada. In other words, its largest stock holdings are kind of mediocre chart patterns.

If you are going to buy an index ETF like the iShares Canadian materials ETF, hope for a rising gold market. With gold facing serious resistance at $1350 (currently $1315), there is a case for only short termed upside in that sector. A strong move in Potash would help, too – but that stock (POT-T) needs to break $26 before we get excited.

All in, the Canadian materials ETF is currently uninspiring from my perspective. It might move a bit higher if as when gold hits its old mid-$1300’s area of resistance, but I don’t think the prospects for its holdings will allow for sustained upside past that point.

Keith on BNN Monday January 8^th 2018 at 5:30pm

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Keith appears regularly on BNN MarketCall to answer viewer questions on the technical analysis of stock trends, and to provide unique insights on the factors of technical analysis used in successful investment management.