You Know Sector is Performing Better than the Magnificent Seven?

Materials… if you can believe that.

I know, it seems unlikely, but companies like 3M (MMM), DuPont (DD), and Martin Marietta Materials (MLM) are leading the market higher with performances that, in some cases, are doubling that of the large-cap technology sector.

Martin Marietta shares are up almost 30% year-to-date, without a mention from the media of its outperformance. That’s just an example.

But it’s the basis for a story that you want to be a part of.

It makes perfect sense that we’re seeing strength from the materials companies.

Recessions are bad for materials companies. Demand for the basic ingredients that go into manufacturing everything from electronics to cars to houses and roads drops. It really is that simple.

We’ve spent the last two years wringing our hands about a recession.

Me included.

But now, economists and the Fed are seeing a pickup in the economy’s growth. That means we’re going to see more industrial activity over the next few years, which means more orders for the materials required.

I already mentioned the fact that you’re not hearing about the outperformance from the media.

That makes us even more bullish on this sector.

You’ve heard the saying “a watched pot never boils”? That simple rule works when looking at the market.

Historically speaking, a sector or stock that is outperforming while nobody is watching tends to continue.  It’s only when the market takes notice and starts crowding into the trade that the sector will start to slow.

Investing in these sectors when they are “quiet performers” allows you to get in before the rest of the market starts bidding prices higher. It’s literally one of the easiest ways to “beat the crowd.”

So, back to the materials sector and how you can take advantage of this situation.

First, the Materials Select Sector SPDR Fund (XLB) is the easiest way to gain exposure to this group of stocks.

This exchange-traded fund (ETF) holds 28 different materials stocks, giving you a diversified approach to invest in the sector. Shares are optionable for those of you interested in leveraging the move to our target price.

Let’s take a look at the chart and my target prices…

First, because of their recent rally, shares of XLB are a little overbought. That means you should be looking for an opportunity to buy the ETF at prices slightly lower than recent closes.

You know how much we prefer round numbers here – because they work – which puts our eyes right at the $90 price level for an entry price.

XLB shares just broke into a long-term bull market trend in December, which puts them early in the rally stage. The last similar bull market started in June of 2020 and lifted the shares 60% in just 12 months.

Before that, a similar long-term bull market started in May of 2016 that yielded 50% gains over an 18-month period.

Bottom Line

The long-term case is strong for the materials.

A pullback to $90 offers an opportunity to buy the XLB shares at a slight discount ahead of an expansion driven rally.

My price target for the XLB shares is $120 over the next 12 months.


About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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