Alcoa's Bullishness Unable to Lift Basic Materials ETFs

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Includes: AA, CHIM, IYM, MXI, RTM, SLX, XLB
by: Gary Gordon

Get used to the term, “uneven recovery.” You’re going to hear it out of the mouths of nearly every CEO this earnings season.

For instance, profits at Alcoa (NYSE:AA) doubled from the year-ago period. In the year-earlier quarter, revenue surged a whopping 27%. Yet CEO Klaus Kleinfeld didn’t hold back from stating, “Although the economic recovery is uneven, the overall outlook for Alcoa and for aluminum remains positive.”

In essence, whatever the uncertain demand for the popular commodity is ... so goes Alcoa. In fact, even after AA shares closed down -2.9% during Monday’s stock market rout, shares were down another -0.70% in after-hours trading.

The 7/11 worldwide sell-off may have been inspired by sovereign debt woes for yet another PIIGS constituent, Italy. Indeed, it seems that fears of eurozone contagion won’t disappear as quickly as an economic soft patch might.

Nevertheless, I discussed investor sluggishness with basic materials last week. (Review “Have Resource-Rich Country ETFs Lost Their Appeal?“) For the most part, I expressed that markets would need to smell victory in the inflation battles being fought by China and India.

Unfortunately, investors in materials ETFs face a challenge in the developed world as well. In the U.S., for example, the lack of hiring may adversely affect economically sensitive segments from materials to energy to technology. Meanwhile, austerity measures across the eurozone may further crimp slumping demand worldwide.

True, a number of stock sectors (e.g., consumer staples, retail, etc.) are within spitting distance of multi-year highs. Yet materials ETFs may be vulnerable:

Vulnerability of Basic Materials ETFs
Approx % Below 52-Week Highs
Materials Select Sector SPDR (NYSEARCA:XLB) -3.1%
Rydex S&P Equal Weight Materials (NYSEARCA:RTM) -3.4%
iShares DJ Basic Materials (NYSEARCA:IYM) -5.6%
iShares S&P Global Materials (NYSEARCA:MXI) -6.4%
Market Vectors Steel (NYSEARCA:SLX) -12.5%
Global X China Materials (NYSEARCA:CHIM) -18.8%
Click to enlarge

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.