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Materials
| The Materials Sector encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel. |
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Actual market weightings for each sector are based on the S&P 1500.
**The Market Analysis, Research and Education (MARE) group is a unit of Fidelity Management & Research LLC.
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Sector Commentary from Standard & Poor's
11/15/2009
S&P recommends overweighting the S&P 500 Materials sector. Year to date through October 23, this sector, which represented 3.5% of the S&P 500 Index, was up 38.4%, compared to a 19.5% increase for the 500. In 2008, the sector index declined 47.0%, versus a 38.5% fall for the 500. There are 13 sub-industry indices in this sector, with Diversified Chemicals being the largest at 23.0% of the sector's market value.
S&P analysts have a neutral fundamental outlook for the sector. Our fundamental outlook for the Diversified Chemicals sub-industry is neutral; although the manufacturing sector showed sequential improvement in the third quarter, the construction and automobile market slowdowns continue to hinder demand, in our view. We expect the sector's EPS to jump 94% in 2010, versus an estimated 34% rise for the 500. The sector trades at a P/E on estimated 2010 EPS of 17.9X, above the 14.6X for the overall market. The sector's P/E to projected five-year EPS growth rate of 2.2X is higher than the market's PEG of 1.5X. This sector's S&P STARS average of 3.1 (out of 5.0) is below the broader market's average of 3.7.
The S&P Materials Index remains in a strong uptrend and prices are once again widening the distance between key moving averages, a sign of strength, in our view. The bullish part of the chart, by our analysis, is that there is very little resistance between current levels and the 230 to 240 region. The U.S. dollar, one of the major influences on commodity prices, remains in a short-, intermediate-, and long-term bear market, which we believe is supporting the Materials sector. The sector has retraced about 50% of the bear market and the next Fibonacci retracement of 61.8% targets the 220 as potential resistance. Relative strength versus the S&P 500 remains in an uptrend and not far from recovery highs. The 14-week RSI has pulled back but remains in an uptrend off the October lows. Weekly momentum is not yet overbought, suggesting to us additional upside is possible. We remain bullish on Materials from a technical perspective.
We recommend overweighting the Materials sector based on our view of a gradually recovering global economy, increasing raw materials demand and the likelihood of further U.S. dollar weakness in the fourth quarter.