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 stocks 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 over 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 eight materials stocks in the S&P/TSX 60 and the S&P 100 indexes. Of these eight, only five stocks have a rising 40wMA: Agrium, Potash Corp., Dow Chemical, E.I. du Pont de Nemours & Co. (DuPont) and Monsanto. Of these five stocks, Agrium is particularly overbought and will likely pull back toward its 40wMA before resuming the up-trend.
The remaining three stocks have a falling 40wMA and these include: First Quantum Minerals, Teck Resources and Freeport-McMoRan. These are quite oversold and may have a small recovery rally.
Readers should consult a professional before making investment decisions.
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.