What Materials, Copper ETFs are Saying About the Market

March 29th at 9:20am by John Spence

The S&P 500 is trading above the key 1,400 level and on track for a 12% gain for the first quarter, but ETFs that invest in the basic materials sector and copper are flashing weakness.

The $1.8 billion Materials Select Sector SPDR Fund (NYSEArca: XLB) is actually down 2% over the past month, while iPath Dow Jones-UBS Copper ETN (NYSEArca: JJC) is also in negative territory with a 3% decline.

Some technical analysts watch materials and copper ETFs to gauge the health of the global economy.

In the past, a lack of upside follow-through by the basic materials sector and copper has been a sign that the economy lacked strength going forward, says Chris Kimble at Kimble Charting Solutions.

“Most materials firms produce commodity products and operate in a highly cyclical industry,” says Morningstar analyst Robert Goldsborough in a report on Materials Select Sector SPDR Fund (XLB). “This fund struggled in 2011, significantly underperforming the broader market amid global economic woes.”

More recently, weakness in top holding Freeport-McMoRan (NYSE: FCX) has weighed on the materials ETF. Other funds in the sector include iShares Dow Jones US Basic Materials (NYSEArca: IYM), Focus Morningstar Basic Materials (NYSEArca: FBM) and Vanguard Materials (NYSEArca: VAW).

Lackluster performance from copper ETFs could be another warning sign for U.S. stocks. Copper demand has been indicative of economic activity because of the base metal’s wide industrial applications. [Paging Dr. Copper]

Materials Select Sector SPDR Fund

iPath Dow Jones –UBS Copper ETN

Full disclosure: Tom Lydon’s clients own FCX.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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