The S&P Metals and Mining Sector

(A sub-sector of the S&P Materials sector)

According to Thackray’s 2010 Investor’s guide, the S&P Metals and Mining Sector has a period of seasonal strength from November 19th to May 6th. The trade has been profitable in 14 of the past 20 periods. Average return per period was 13.8%. Average return per period exceeded the S&P 500 Index returns by 7.9%.

The sector has a seasonal sweet spot between January 29th and May 6th. The trade has been profitable in 13 of the past 20 periods for an average return per period of 6.3%.

Chart courtesy of Brooke Thackray

Strength during the period of seasonal strength can be attributed to rising demand and prices for basic commodities including copper, zinc, nickel, steel, iron ore, silver and platinum.

Technical influences

Chart courtesy of StockCharts.com www.stockcharts.com

The TSX Global Mining ETF has a mixed technical profile. Intermediate trend recently changed from up to neutral when the Index fell through support at 98.39. The Index has dropped 12.3% since its high two weeks ago. Short term momentum indicators are trending lower and already are oversold. However, they have yet to show technical signs of bottoming. Strength relative to the TSX Composite Index is negative and has not shown technical signs of recovering.

Fundamental influences

Earnings growth prospects in 2010 are exceptional. Demand for materials is expected to accelerate as spending from economic stimulus programs announced by the world’s largest nations last year start to focus on infrastructure programs. Planning and engineering have been completed. The shovels for many of these programs go into the ground this spring. Prices of basic materials including copper, zinc, lumber, steel, iron ore, silver and platinum are expected to continue their uptrend from depressed 2009 levels.

Seasonality in key stocks in the TSX Global Mining Index from Jan. 29th to May 5th

Company Average Return Frequency of

Per Period (%) Profits (out of past 10 periods)

BHP Billiton 23.7 5

Rio Tinto 2.4 7

Freeport McMoran Copper 21.4 7

Goldcorp 6.9 6

Teck Corp. B 22.3 9

The Bottom Line

The seasonal trade in the sector is lining up nicely this year. A refined technical entry point has yet to appear, but likely will arrive shortly. ETFs in the sector include the Claymore S&P/TSX Global Mining Index (CMW), BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index (ZMT), the Horizons double leveraged HBP S&P/TSX Global Base Metal Bull Plus ETF (HMU) and the S&P Metals & Mining SPDR (XME).