Two of the year’s biggest winning sectors again landed in the spotlight with investors turning optimistic that both sectors had room to run.
As you may know energy and materials had been top performers this year pushing the S&P to a bull market high earlier in 2011, before paring some gains.
However, during recent weeks investors began to question whether the commodities bull had run out of stamina, especially after new data called global growth into question. For example, China’s PMI just hit a 10-month low.”It’s no secret that commodities have led the recent decline in the market,” reminds CNBC’s Scott Wapner.
But then, on Tuesday Goldman Sachs practically re-ignited the bull single-handedly. The firm raised its price forecasts on a slew of commodities including crude oil and industrial metals and they reiterated their positive view on gold.
“We now believe that the risk/ reward once again favors being long commodities," says Goldman analysts. "We are shifting back to a near-to medium-term overweight recommendation.”
On the news shares of the XLE shot higher. Does that mean risk is back on the table? Did Goldman just save the rally?
Instant Insights with the Fast Money traders
Trader Joe Terranova does think its time to put risk trades back on. “Are we in the process of a meltdown? I don’t think so,” he says. Terranova considers the recent pullback 'normal' and expects stocks to continue their march higher. "It's a pause that refreshes," he says.
In fact, Terranova feels the time to rotate out of some of your more defensive positions such as health care is now. ”I’d own integrated names as a second half story,” he says.
Trade Brian Kelly thinks the recent sell-off in energy and materials may have been an overreaction to some of the news headlines. He reminds the desk that although China PMI slipped to a 10-month low, “we’re still looking at 8% GDP. If we grew like that in this country we’d be ecstatic. Put it in perspective,” he says.
Kelly also sees other reasons to remain bullish. He thinks China will generate more demand for diesel fuel because of reported electricity rationing. (Smaller generators are fueled by diesel.) He suggests gaming it with a long position in refiners such as Valero or Holly Corp. However, it's worth noting Kelly is making his bets with calls to limit his risk.
Trader Patty Edwards is more on the fence. Edwards shares Terranova’s enthusiasm for the large integrated names, however she also suggests watching the action in WTI as a ‘tell.’ Following Goldman’s bullish note, “It’s not talking off the way I would have expected,” she says.
Trader Zach Karabell reminds the desk that the commodities trade could be facing headwinds in the form of a stronger dollar. Concerning the financial woes vexing Europe, “Over the next 3 to 4 weeks, I expect more dollar strength,” he says. “That plays into the commodities story.” And he adds, if you're trading with a short term time horizon, it's probably smart to form your thesis about metals separately from energy.
What do you think? We want to know!
