Metal Stocks Trading Heavy?

If someone were to tell you that the metals stocks are oversold, you’d quickly stop listening, but as the chart below highlights, according to at least one measure, metals stocks are due for a rally.

With a 30%+ return year to date, the overall gain in the S&P metals group has been impressive, and the returns of some of the individual names is even more so.

 

Yet the overall gains pale in comparison to the 50%+ year to date return of the commodities these companies produce and sell.

The chart below divides the price of the S&P 1500 Metals Index by the price of the Bloomberg Base Metals Commodity Index. A rising line indicates that the prices of metal stocks are rising faster than the underlying commodities, while a falling line represents periods where the metal stocks are underperforming. In the upper chart, we have highlighted those occurrences where the ratio of metal stocks to metal commodities was less than or equal to one.

As the chart details, even after the significant gains in the metal stocks, they have been underperforming the underlying metals to the point where the relationship between the two is at levels which in the past has led to rallies in the stocks. So, while it's certainly hard to say that metal stocks are underrvalued after the run they've had, the data below suggests that investors shouldn't be too quick to jump off the bandwagon.

Comments

[x]

While I'd ride these hogs till they aren't worth riding anymore, it may finally be different this time. The refusal of stocks to follow suit may be indicative of a top. May be temporary or may finally be it. ie, Equity traders refusing to bid the stocks up because they realize the metals have finally had a blow off rally. Many things point to this being a possibility. Just as you have secrets, so do I.

[jjj]

i think the metals are suffering from expropriation fears following the bolivian nationalization of gas fields.

[x]

That would be an interesting thought if it weren't that metals started reflating four years ago and haven't moved up since the Bolivian mess. But, hey, your post was well thought out. lol.