7.23.13: Basic Materials Sector Coming to Life ?

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If there has been a beaten-down sector that is thoroughly trashed from a numbers and sentiment perspective in 2013, it is the Basic Materials sector. Basic Mat has lagged the SP 500 badly in 2013, but that could be starting to change.

Dennis Gartman was on CNBC’s FastMoney last night talking positively about the gold miners. In addition, Freeport-Copper (FCX) reported Q2 ’13 results this morning, and the stock is up on heavier volume, after basing for most of the summer.

Our three Basic Materials names in client accounts are Alcoa (AA), Freeport (FCX) and US Steel (X). Both Alcoa and Freeport are higher after reporting results. Alcoa is trading at $8.13 today after trading near $7.90 when it reported results on July 8th. Q2 ’13 earnings were not a catalyst for AA as hoped, but the stock is not trading lower either despite lower EPS and revenue revisions following the Q2 ’13 report.

At just 3% of the SP 500, Basic Mat isn’t hugely important from a market cap perspective, but you can generate good performance getting the cycle right.

We’ll be out with more sector estimates shortly, but today we wanted to focus on Freeport (FCX) and its positve action  after results.

The XLB is one way to get Basic Mat exposure in your portfolio. FCX is 6% of the XLB (SPDR Basic Mat ETF), while AA is 1.75%. All of this data is from Morningstar.

A trade through $35 for FCX, we’d think would be very positive for further upside. However, we are a fundamentals shop primarily so Gary Morrow, a friend and hedge-fund manager out of California, who is a far better technician, has provided us with some of his technical commentary on FCX today.

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Technical commentary on FCX – Gary S. Morrow

Freeport-McMoRan

The rebound off the June lows may soon develop into a major double bottom for Freeport-McMoRan.   Shares have been in rally mode over the last three weeks and are getting a nice spark from this morning’s earnings report.   FCX is up 2% on the news and is putting some distance on heavy resistance near the $29.20 area.   The stock still has hurdles to overcome if a new bull leg is on the horizon but the foundation for this type of a move is steadily improving.

Back in early December FCX suffered a extremely damaging blow.  The stock collapsed over 15% on ten times its average trade announcing acquisitions plans.  Numerous downgrades followed but the initial damage on Dec. 5th was already done.  FCX quickly became deeply oversold and by mid January roughly half of the flush had been recovered.  As February opened a heavy 200 day moving average came into play putting a stop to the oversold bounce.  Since the the multi week highs of February the stock has remained very volatile as it worked lower.  Another ugly downside gap in early April pushed the stock to new 52 week lows as volume picked up again.  A week later FCX was taking out its 2011 lows but further downside was limited while the initial selling momentum quickly eased.  Shares found solid support near the 2010 lows of $26.25.  Within a few weeks of hitting this level three years ago FCX returned to rally mode.  Eight months later the stock had doubled reaching all the way up to $60.00.  That level remains a five year high.

Just last month FCX re-tested the major support zone near $26.25.  With news flow improving for the company and the July rally picking up steam the stock could be in the early process of putting in a major double bottom that includes the April/June lows.  This bullish action should be very encouraging for FCX bulls.  In the near term the stock has a solid layer of support now in place near the $29.00 area.  Included here is a scooping 50 day moving average as well as multiple weekly highs in late June and early July.  I expect the stock to remain above the $28.00 area as a new bull leg develops.   On the upside FCX still has a key hurdle to clear.  A close above $30.50 would push the stock past its June highs and would clear an overhead trendline that links both the February and May peaks.    Once convincingly through this area, with the help of accelerating trade, Freeport will be poised for a significant bull run.  If the post July 2010 rally is an indication of the potential in place, there is great deal of upside to be had.

 

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