The Materials index closed on Friday Oct 31, 2008 at $195.77. The materials index has a market capitalization of about $1 trillion, which represents about 18% of the S&P/TSX Composite index. The last time I wrote about Materials was in June and at that time it represented 22% of the TSX and was at about $1.5 trillion in market capitalization. Some Canadian companies you may recognize in the Materials Index are Agnico-Eagle Mines Ltd., Agrium Inc., Barrick Gold Corporation, Canfor Corporation, Eldorado Gold Corporation, Fording Canadian Coal Trust, Goldcorp Inc. and Nova Chemicals Corporation.

The high for the Materials index over the last year was $426.23 on June 30, 2008 and the low was $157.02 reached on October 24, 2008. From the peak (high) to trough (low) that represents a decrease of -57.7% for the Materials index vs. the S&P 500, which was down –31.5% over that same time frame and the S&P/TSX, which was down – 35.8%. Since it is the end of October and another quarter, let’s assess the damage. Year-to-date the Materials index is down –42.1%. The S&P/TSX is down –29.4% over the same period, the S&P 500 is down –19.9% and the EAFE is down –33.2%.

Technically, the chart is telling us that investors are still bearish toward the Materials index. The trend from last year until June 30, 2008 was bullish represented by the upward price momentum in the chart. Similar to the overall market, a double top pattern occurred on June 27, 2008 and July 15, 2008 followed by a downward channel from July 15, 2008 to date. On July 16, 2008 the current price dropped below the 50 day moving average at about $400. The short-term rally has produced a 19.5% return, however, the 50-day moving average is now at about $267 so it still has a long way to go to convince us that there is a sustainable longer-term rally.

The Materials index price-to-earnings ratio is trading at 11.09 times vs. 24.53 times back in June of this year. The dividend yield is averaging 1.5%. Rio Tinto’s CEO, Tom Albanese, has said the economic slowdown in China is worsening and that demand won’t rebound until 2009. “It is decelerating more in the fourth quarter than we saw in the third quarter. That is going to lead to a deferred pickup in cumulative demand for most of the things we produce during the course of 2009.” I would also encourage you to read The Gartman Letter where he argues that Canadian stocks are oversold and he is bullish towards Canada and the Canadian dollar, which should support materials. He also argues that the panic buying of the Yen and the panic selling of the Euro have run their course. From a technical standpoint this relationship is at its 10-day resistance for the Euro vs. the Yen so watch it closely to see whether it breaks or continues this trend because it seems to be directly related to any rally in stocks and currencies vs. the yen. The US$ has already broken this trend vs. the Yen. Lastly, from a seasonal perspective, materials generally do well between now and May.

In the short term technicals and fundamentals are bearish. Things are changing fast so be prepared to take advantage of any bullish spurts in this bearish environment.