This could be the time to lighten your exposure to mining stocks and rotate into oil & gas producers as the golden run in the share prices of our miners have hit a stumbling block.
Waning metal prices from the escalating global trade war and the threat of a strengthening US dollar are conspiring to drag miners off their perch following the 20% surge in the S&P/ASX 200 Materials (Index:^AXMJ) (ASX:XMJ) index in FY18.
This compares to the 10% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) although the mining-heavy ASX 200 Materials index has lagged over the past three months with a modest 1.2% gain when the broader market is up 7%.
Metal prices may have bounced on the weekend but the gain is unlikely to last as the recovery is due to US President Donald Trump jawboning the US dollar down, which in turn helps commodity prices.
The US dollar is unlikely to stay down, particularly if Trump carries out his threat to impose tariffs on all Chinese imports.
Experts interviewed by Bloomberg believe the short-term outlook for metal prices is bearish on technicals (meaning chart patterns and price momentum), although this isn’t the same for the oil price.
The technical picture for crude continues to look supportive, particularly after Saudi Arabia dismissed speculation that it will increase supply of the commodity beyond the needs of its customers.
This says to me that the world’s largest oil producer wants the oil price to stabilise around current levels.
Oil Floats & Metals Sink: Relative 3-month performance of the Energy and Materials index to the S&P/ASX 200
Source: Yahoo Finance
From a trading perspective, this could create an opportunity for investors to take profit on some mining stocks and up their exposure to the energy sector, which is dominated by Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO).
This is more a short-term play as I still believe the medium-term fundamentals for the mining sector are good, particularly given that BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are set to add to their multi-billion dollar capital return programs.
But the lack of potential positive surprises from the sector in the near-term (with miners effectively flagging their full year profit results through the latest production reports) will leave miners vulnerable to weakening commodity prices.
I can’t dismiss the potential for our best loved mining stocks to underperform over the next month or two and this creates an opportunity for energy stocks to pull ahead in the shorter-term.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.