With stocks marching higher as fears over the fate of the eurozone subside, a few specific sector groups look ready to lead the way. Here’s a quick look at those sectors showing relative strength against the broad market, as well as a few individual stocks picks within those areas.
The key here is that renewed vigor of the euro — which is putting pressure on the U.S. dollar. That in turn is helping to lift dollar-sensitive assets including crude oil, commodity stocks and foreign equities. As a result, materials and energy stocks have been strong performers this week — and with a number of stocks in these groups showing technical strength — the performance looks like it will continue.
Between the two, the materials sector appears to be slightly better shape. As you can see in the chart above, the relative strength of the Materials SPDR ETF (NYSE: XLB) is accelerating again. A number of the stocks in the group, including Century Alumium (NASDAQ: CENX), Cliffs Natural Resources (NYSE: CLF), and Russian steelmaker Mechel Steel Group (NYSE: MTL) are breaking out of recent consolidation ranges and look ready to move higher.
Mechel is doubly blessed since it benefits from the dollar’s renewed weakness in two ways — through investor interest in materials stocks and emerging market stocks. Shares are up 3.2% in midday trading on Friday and have been under heavy accumulation for the last three days. With three-month resistance now broken, MTL has a clear shot at its April highs, which would be worth an 18% gain from current levels.
For the risk takers, another way to profit from the rise in commodity stocks is via the DB Base Metals Double Long ETN (NYSE: BDD), which returns twice the daily return of a basket of industrial metals including copper and aluminum. The fund tends to outperform similarly leveraged materials stocks — as represented by the ProShares Ultra Basic Materials (NYSE: UYM) — during uptrends. So for those looking to play the uptrend over the next few weeks, BDD might be the best bet.
Disclosure: The author does not own or control a position in any company mentioned but has recommended BDD to his newsletter subscribers.
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