John Roque, a friend of Cramer’s and head of WJB Capital’s technical analysis strategy group, has this theory. He thinks the materials stocks—the Freeport-McMoRans , Alcoas , DuPonts , PPG Industries and Dow Chemicals of the world—are set to go higher even thought they’re already at or near their highs.
Roque bases his theory on one specific chart. It shows the percentage of the total market cap of the S&P 500 that’s made up by the basic materials stocks. The chart shows that in 1989 these companies accounted on average for 4.5 percent of the S&P. Go as far back as 1977 and the number jumps to 8.6 percent. Right now, though, these materials names comprise just 3.7 percent of the S&P.
So what’s the theory? That now as the world’s economies are ramping up, and with renewed signs of health here in the U.S., the market cap of the materials stocks as a percentage of the total S&P should increase, moving back up to their average over the last 21 years and beyond. This “reversion to the mean,” or return to the historical average, would mean a major move higher for these stocks, Cramer said.
That’s Roque’s theory at a basic level. But if investors plan to trade on this information, they’ll need to also take into account just how high that mean could go. Will it surpass 4.5 percent and go higher? And how will money managers weight these stocks in their respective portfolios? How should you do that? Plus, what are the best stocks in this group to buy?
Cramer covered all of that in this week’s “Off the Charts” segment. Watch the video to see his full report.
When this post was published, Cramer's charitable trust owned Alcoa.
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