Materials and energy stocks are a tempting target for bottom-fishers, since so many stocks are trading at multiyear lows. In the past six months alone, the primary indices that track these groups have fallen anywhere from 25% to 45% amid the weakness in commodity prices and the strength of the U.S. dollar.
But right now, picking a low is shaping up to be awfully dangerous.
The basis for this assertion is the alarming chart formations that exist among many energy and materials stocks right now. In industry groups as diverse as gold, silver, steel, general mining and energy, a number of stocks are sitting right at support and look to be in jeopardy of breaking down with the slightest push from additional commodity weakness, a continuation of the rally in the dollar or any downturn in the broader equity market.
We’re going to look at 12 charts in particular that show stocks or funds in the danger zone. Long-only investors need to be very careful with any of the stocks in this list, since energy and materials stocks, in general, have perpetually failed at holding their lows in the past two years, while those who are willing to bet against stocks can consider these as potential shorts.
Gold and gold stocks fooled investors with yet another false rally in January, and they have since given back virtually all of the gains in the past six weeks. The selloff has put the SPDR Gold Trust (ETF) (NYSEARCA:GLD) in a perilous position, as it is now trading right above its previous low of $109.67. Given that gold has been unable to hold any of its lows for two years now, traders need to position themselves for another breakdown until the metal can demonstrate the ability to hold support.
The weakness in gold has naturally carried through to gold mining stocks, putting Barrick Gold Corporation (USA) (NYSE:ABX) near its previous low. Watch this stock closely, since it is much closer to support than either of the broader sector ETFs: the Market Vectors Gold Miners ETF (NYSEARCA:GDX) or Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).
If Barrick fails here, the rest of the group is likely to follow in relatively short order.
Silver and silver stocks usually track gold fairly closely, so it’s no surprise that this group also has more than its share of names that are vulnerable to breaking down. Silver itself, as represented by the iShares Silver Trust (ETF) (NYSEARCA:SLV), is a few pennies away from its low of $14.63. Accordingly, a number of the related equities are also on the verge of additional downside unless silver can hold its ground. Among them are Pan American Silver Corp. (USA) (NASDAQ:PAAS), Silver Standard Resources Inc. (USA) (NASDAQ:SSRI) and MAG Silver Corp (USA) (NYSEMKT:MAG).
You can click on the image below to see an enlarged version of all four charts.
The steel sector has also had its share of troubles, bringing the Market Vectors Steel (ETF) (NYSEARCA:SLX) back to support. The underlying stocks in the index offer a more diverse set of charts due to differences in currency exposure and the types of steel they produce. As a result, the SLX ETF — which combines all of the stocks in the sector into a single chart — can be used to provide a clear indication of near-term direction for the rest of the group.
One possible indication of whether SLX will find support here comes from the Market Vectors-Coal ETF (NYSEARCA:KOL), which tends to track SLX with an extremely high correlation. The KOL ETF has already broken down, as shown below, which indicates that caution is warranted for anyone thinking of jumping into steel stocks in the immediate future.
Everything is working against base metals prices right now, from slowing global growth to the rising U.S. dollar. This can be seen in the chart of the PowerShares DB Base Metals Fund (ETF) (NYSEARCA:DBB), which holds weightings of approximately 33% each in aluminum, copper and zinc. The ETF is struggling to hold support at $14.55 and appears to be destined for new lows. This spells trouble for stocks such as BHP Billiton Limited (ADR) (NYSE:BHP), which is facing a similar battle to avoid a new 52-week low:
The energy sector has what may be two of the most telling charts in the resources group right now: Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP). Both are trading right at support, and a breakdown would provide an extremely bad omen for the rest of the energy sector. The reason: Both are paying huge dividends that are well above that of the either the sector as a whole, the broader market, or most large-cap stocks. CVX stock is currently yielding 4.2% and COP has a payout of 4.7%, which are numbers that are hard to find.
If these stocks break down while offering yields of this magnitude, it will show that investors are unwilling to own energy stocks at virtually any price — a horrendous signal for the rest of the group.
The takeaway: Don’t try to bet against these stocks, but use them as a bellwether for the rest of the group.
The Bottom Line
Energy and mining stocks look interesting at these levels, but it would have been possible to say that any point in the past year. Investors have been well-served by exercising caution in the resources group thus far, and the charts are indicating that this trend is unlikely to change in the immediate future.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.