This Stock Is Outperforming Its Sector and It's Time to Open a Position
As this underperforming sector turns around, one stock stands out.
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By most accounts, the U.S. economy is gaining strength.
The final reading for third-quarter GDP came in at 3.1%, accelerating from 2.8% and beating analysts’ estimates. Retail sales for November jumped by 0.7%, rising from the prior 0.5% reading. The November non-farm payrolls report showed a solid rebound in job creation.
However, not every indicator is positive. The materials sector could be considered a forward-looking indicator for the economy.
This sector, represented below by the Materials Select Sector SPDR XLB, underperformed the overall market last year. XLB experienced a dramatic decline in December, but has recently stabilized.
There are two points of interest on XLB’s daily chart.
In recent sessions, XLB has traded on heavy volume (point A) as the price has stabilized. The sector bellwether’s falling 50-day moving average (blue) cut beneath its falling 200-day moving average (red), an indication of bearish momentum (point B).
Based on the above, you’d probably want to avoid this sector. However, the longer-term weekly chart tells a different story. In this time frame, the materials sector has reached a major inflection point that could result in a reversal.
In the weekly timeframe, XLB has reached key support (black arrow) in the form of its 200-week moving average (red). XLB bounced sharply from this MA in 2022 and 2023 (green arrows). The ETF hasn’t traded beneath its 200-week moving average for an extended period since the early days of the pandemic, in 2020 (left side of chart).
Since the sector has found long-term support, now might be a good time to initiate a position. Unfortunately, most of the daily charts in the materials sector reveal heavy selling. However, I did find one name that seems positioned for a solid bounce.
I’m referring to Corteva CTVA. This Indianapolis-based company specializes in agricultural chemicals, and is a spinoff of DowDuPont. Unlike most of the names in the materials sector, Corteva remains above its 200-day moving average (red).
In addition to being a holding of the Materials Select Sector SPDR, Corteva is also a component of the VanEck Agribusiness ETF MOO. Corteva is outperforming MOO, just as it is outperforming XLB. Both ETFs underperformed the major indexes in 2024.
The charts indicate that it’s time to open a small position in Corteva. This is not necessarily for a trade, as I hope to grow this position into a longer-term holding.
Risk management dictates that we will add to the position slowly, in anticipation of a recovery of the materials sector. If the stock and/or the sector fail to cooperate, we will liquidate the position.
At the time of publication, Ponsi was long CTVA.
