Metals Stocks: Oversold?! (GG, GLG, NEM, RTP, AUY, BGO, ATI)

by: TickerSense

If someone were to tell you that the metals stocks are oversold, you’d quickly stop listening, but as the chart below highlights, according to at least one measure, metals stocks are due for a rally.

With a 30%+ return year to date, the overall gain in the S&P metals group has been impressive, and the returns of some of the individual names is even more so:

Yet the overall gains pale in comparison to the 50%+ year to date return of the commodities these companies produce and sell.

The lower chart here divides the price of the S&P 1500 Metals Index by the price of the Bloomberg Base Metals Commodity Index. A rising line indicates that the prices of metal stocks are rising faster than the underlying commodities, while a falling line represents periods where the metal stocks are underperforming. In the upper chart, we have highlighted (red dot) those occurrences where the ratio of metal stocks to metal commodities was less than or equal to one.

As the chart details, even after the significant gains in the metal stocks, they have been underperforming the underlying metals to the point where the relationship between the two is at levels which in the past has led to rallies in the stocks. So, while it's certainly hard to say that metal stocks are underrvalued after the run they've had, the data below suggests that investors shouldn't be too quick to jump off the bandwagon.

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