NEW YORK (TheStreet) -- Investors looking to capture gains from a global economic recovery should look to the basic materials sector for stocks engaged in the production of chemicals, fertilizers, paper, building materials, steel, gold, copper, iron and other specialty items that make up the guts of the global economy.
One way to participate in this market is through the
Materials Select Sector SPDR Fund
, which includes stocks of 30 companies that operate in these industries.
It may be time for investors to give the Federal Reserve the benefit of the doubt. Isn't it time that Federal Reserve policy finally gets the U.S. economy and then the global economy back on track?
We have had a zero to 0.25% federal funds rate since mid-December 2008. This was followed by the expansion of the Fed's balance sheet to around $2.8 trillion on June 2011 when the second round of quantitative easing, or QE2, ended. Policy action then shifted to "Operation Twist" last September.
Today, expectations include the call for another $500 billion addition to the balance sheet via QE3, which could be announced after this week's Federal Open Market Committee meeting ends tomorrow afternoon. During a QE3, the Fed's balance sheet would bulge to $3.3 trillion from below $1 trillion prior to the "Great Credit Crunch," which began at the end of 2007.
The prospect of a return to global growth should help the basic materials sector. Investors can capture this trend using my "buy and trade" strategy on the Materials SPDR. The weekly chart shows XLB plummeted 61.7% from its May 2008 high of $46.54 to its March 2009 low of $17.83. The rally from that March low into the April 2011 high at $41.28 was a gain of 131.5% on hopes of an economic recovery.
Source: Thomson Reuters
The daily chart shows that since that April 6, 2011 high at $41.28 the XLB has moved sideways to down, as shown by lower highs right through QE2 and Operation Twist. This is a warning that Federal Reserve policy is not getting the desired results of an improving economy.
From the weekly chart, a close this week above the five-week modified moving average at $34.96 keeps the weekly chart profile positive. From the daily chart, a trend above the 200-day simple moving average at $35.20 increases the odds that this sideways to down pattern can be broken.
Source: Thomson Reuters
My "Buy and Trade" Strategy for XLB.
($35.08) -- My annual pivot at $35.72 has been a strong magnet so far in 2012, and this level must be cleared for upward momentum on the daily chart to begin again. My weekly risky level is $36.71 with a quarterly risky level at $42.96. If the breakout does not occur, beware that my semiannual value levels lag at $24.37 and $23.11.
The above table shows data from
covering the 30 components of the XLB listed from top to bottom by percentage of index weight. This ETF is heavily weighted with
(11.1%). Note that there is only one gold mining stock,
Reading the Table
OV/UN Valued -- The stocks with a red number are undervalued by the shown percentage, according to ValuEngine. Those with a black number are overvalued.
VE Rating -- A 1-Engine rating is a strong sell, a 2-Engine rating is a sell, a 3-Engine rating is a hold, a 4-Engine rating is a buy and a 5-Engine rating is a strong buy.
Last 12-Month Return -- Stocks with a red number declined by the shown percentage over the last 12 months, while stocks with a black number increased.
Forecast 1-Year Return -- Stocks with a red number are projected to decline by the shown percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.
Analysis of the Basic Material Sector
The basic material sector is undervalued by 14.7%, according to ValueEngine, which is a reason to consider investing in this sector. Keep an eye on the price-to-earnings ratios, as several components have P/E ratios above 20.
Looking at the performance measures, only four out of 30 stocks in the XLB have traded higher over the past 12 months:
. Beware, however that these names are trading near all-time highs. FMC is rated a hold, while the other three are rated buy, according to ValuEngine.
To summarize, the XLB needs to breakout above my annual pivot at $35.72 to regain the momentum that would signal that Federal Reserve policy will fuel a sustainable economic recovery both in the U.S. and abroad.
At the time of publication, the author did not own any of the stocks in the table or XLB
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined
in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs
and can be reached at