Materials

Confirming indicators still do not validate the oversold rally. Fade the materials sector bounce, by selling steel down to underweight.

As confidence in the sustainability of corporate sector profitability declines, the multiple accorded to equities should recede. Ten reasons to stay underweight the tech sector. Initiate an overweight position in gold shares.

A stunning 9.9 million-barrel build in U.S. oil inventories this week failed to arrest the upward climb in prices.

Materials stocks have been beaten down to the point where it is tempting to declare that all the bad news is already discounted. However, we remain reluctant to recommend investors attempt to catch this falling knife. China remains the marginal price setter for commodities, and its growth struggles are very deflationary (bottom panel). That is adding to the profit stress exerted by U.S. dollar strength. Importantly, materials sector cash flow is contracting at a time when its interest rates are rising. Deteriorating materials sector financial health is evident by the sinking interest coverage ratio. Worryingly, spiking high yield materials sector bond spreads are warning that basic materials credit quality has further to fall (spreads shown inverted, middle panel). Balance sheet stress argues for a rising materials sector equity risk premium. Bottom Line: Stay underweight the S&P materials sector. bca.uses_in_2016_01_27_002_c1 bca.uses_in_2016_01_27_002_c1