Above all, investment managers like to buy relative strength in
earnings. With China and most of the other industrial economies
in recovery mode after deep recession, analysts look for basic
materials or "smokestack" companies to post gains in profits
for 2010 that far outstrip the earnings potential for the broad
market.
The keys here are recovering volumes and prices which give the
basic producers sizable earnings leverage over a large base of fixed
cost. True to form, industrial commodities prices are trending up
and are well above prior year levels.
For large players, the $XLB is a momentum game which feeds on
volume recovery and pricing, with pricing getting the edge in
emphasis. The group tends to do well early in each year when
re-order rates and pricing are seasonally strong.
With China now a large player in heavy industry, investors have
a greater interest in this group than at any time since the 1970s,
and it is favored as a pricing power play.
I have linked to a relative price strength chart for the $XLB as
compared to the SP 500. Notice the recent seasonal breakout in
RS but notice too that this trade is getting overbought short - term.
Remember as well that historically at least, this group often loses
its advantage as the big earnings gains are being posted. Players
still regard them as "rotgut" cyclical plays.
CHART.
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