What are we looking at?
Canadian and U.S. materials stocks.
The screen
We limited our pool to the S&P/TSX 60 index and the S&P 100 index.
To find the most promising, we looked at each stock's 40-week moving average (40wMA). This is the average closing price for the stock over a period of 40 weeks. Charting the moving average week by week gives us a sense of investors' behaviour: Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock?
Generally speaking, stocks that trade above their rising 40wMAs are the best candidates for investments; they are the ones that show a bullish pattern. We identified the status of each stock's average (rising, falling or flat) in the adjoining table.
We chose this indicator because stocks tend to stay relatively close to their 40wMAs. When stocks rise far above this average, investors often use this as an opportunity for profit taking, since this usually leads to a price correction toward the 40wMA. Similarly, when stocks decline far below this average suggesting a change in trend, investors can usually expect a recovery rally to follow toward the average, which also provides a selling opportunity.
More about Phases & Cycles
Phases & Cycles Inc. has been providing independent research for more than 24 years, using behaviour analysis. It publishes investment ideas for both the Canadian and U.S. equity markets. Its research reaches more than 1,000 users across North America and Europe.
What did we find?
There are a total of 15 materials stocks in the S&P/TSX 60 and the S&P 100 indexes. Only two of these are trading above their rising 40wMAs: Agrium Inc. and E.I. du Pont de Nemours & Co. (DuPont). The remaining 13 stocks have either a falling or flat 40wMA, suggesting that the sector as a whole is weak.
A number of stocks are currently oversold and could have a minor recovery rally toward their 40wMAs; these are Eldorado Gold Corp., Kinross Gold Corp., Silver Wheaton Corp. and Yamana Gold Inc.
A number of precious metal stocks in this group are currently base building. These stocks could become positive with a sustained rise above their respective trading ranges. These include: Agnico Eagle Mines Ltd., Barrick Gold Corp., Eldorado Gold, Goldcorp Inc. and Silver Wheaton.
There are three additional materials stocks of interest that are not from this pool: CCL Industries Inc., Franco-Nevada Corp. and HudBay Minerals Inc. CCL Industries and Franco-Nevada have been in a long-term up-trend for the past two years and are trading above their rising 40wMAs. HudBay Minerals recently had a breakout above a large trading range to signal the start of a new up-trend.
Readers should consult a professional before making investment decisions.
A more detailed list, covering a larger pool of materials stocks, can be requested by e-mailing info@phases-cycles.com.
Ron Meisels is the director of research and Monica Rizk is the senior technical analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.