Data Diary

ASX200 Materials & Energy sectors – shaken not stirred

Posted on 17 February 2010

The commodities complex has taken on an interesting hue of late.

The ASX200 Energy index has been fluffing around since its last high back in October last year.

Technicals – While MACD, momentum and a broken uptrend all suggest lower prices to come, the slow stochastics have crossed on the turn – so we may be close to a bottom?  I’d suggest time is on our side, no need to jump in until there is confirmation of a trend change (eg. the MACD crosses to the upside).

Fundamentals – The energy market is a many headed beast – driven by supply/demand, political risks and inflation expectations.  I don’t have a strong view nor any reliable indicators that I could point to.  Over the long term, global energy demand is headed higher (look at a map of the world at night – plenty of dark patches).

Conclusion – There is always a place for energy in the portfolio but at the moment it’s underweight.

While over to the ASX Materials Index – where the price action has been very tense of late.

Technicals – The uptrend that has been sustained since late 2008 has been at best sorely tested – but more likely broken. Combined with the rolling over and crossing of the MACD, a lower low in momentum and slow stochastics yet to hit value territory and the odds strongly favour lower prices in the not so distant future.

Fundamentals – While the US and Europe plot out their respective ‘recoveries’, for base metals it’s all about China. Depends on who you read – Hugh Hendry, Jim Chanos and others have been banging on about the overcapacity in China’s heavy industry and real estate sector for some time.  January’s loan data and the subsequent tightening in liquidity suggest at least that the commissar’s would like the economy to slow.  The best indicator there is on fundamental demand in the materials sector is the Baltic Dry Index and it is still heading south.

Conclusion – The technicals are painting a very clear picture here – sell.  The risk of the dragon running out of steam is a real and present danger to the commodity sector and if you believe the BDI – then it may well be unfolding now. For mine, the portfolio has but the smallest exposure to the sector (ie. really underweight).