NEW YORK, July 30 (Reuters) - A recent pickup in energy and materials stocks indicates investors are ready for some bottom-fishing, after concerns about China's stumbling economy and stock market accelerated a slide in those sectors.
After hitting its lowest level since October earlier this week, the S&P 500 materials sector has risen three consecutive sessions for a gain of more than 3 percent. Energy sector stocks are up more than 4 percent in the past three days.
China is the world's second-largest oil consumer behind the United States and the world's top consumer of copper and iron ore, so fears that the Chinese economy is slowing can translate quickly into worries about those markets.
"The opportunity in my view is the commodity markets may be close to the end of a selling climax and it may be nearing a great time to buy commodities, commodity sectors and commodity stock markets," said Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
Commodity prices - and commodity-related company stocks - already had been falling steadily as Shanghai's benchmark rose 150 percent in the 12 months to mid June, with Brent crude prices tumbling 44 percent in the same period while copper lost almost 12 percent.
Once Shanghai's bubble began to deflate, those sectors got worse. Since June 12, Shanghai stocks have fallen 30 percent, while the energy sector has fallen as much as 10.3 percent and materials lost 11.2 percent.
"Some of the drop in Chinese stocks caused people to shed risk, including the selloff of commodities, which gave a false signal to energy stocks and resulted in an oversold condition," said Paul Zemsky, chief investment officer, Multi-Asset Strategies and Solutions at Voya Investment Management in New York.
Energy now is the most avoided holding by fund managers currently, with the underweight to the sector "over two standard deviations away from the historical average", according to Bank of America/Merrill Lynch.
To the contrarian, that screams "buy!"
Expectations for earnings declines in the large cap energy sector have modestly retreated from a negative stance as U.S. gasoline demand rises steadily this month and stockpiles fell sharply last week.
Earnings were expected to decline almost 65 percent this quarter from a year ago (the same period during which oil prices almost halved), but the latest reported and estimated results point to a decline of 57 percent, according to Thomson Reuters I/B/E/S/ data.
Exxon, which reports earnings on Friday, hit a more than three-year low Monday before rallying 4 percent Tuesday to close at $82.48, its best day since 2011. It currently trades near $83 and the median price target is above $92.
Downstream, refiner Valero has fallen as much as 8 percent in the past three weeks, including a near 3 percent drop Thursday after posting results. Its stock price, near $63, compares to the $75 median target price from analysts and StarMine's $91.93 intrinsic valuation reading.
Copper hit its lowest since July 2009 earlier this week and U.S. crude dropped to its lowest since March, when it touched a six-year low.
Shares of Freeport-McMoRan Inc, the biggest U.S.-listed copper miner, are down 50 percent year to date and on Monday hit $11.16, their lowest since January 2009. At around $12 on Thursday, the stock could rise 67 percent to meet its intrinsic value of $20.07, according to StarMine data.
Paulsen is recommending clients buy energy, materials and industrials companies, as well as invest more broadly in commodity-reliant Canadian and Australian markets.
The energy sector's relative strength index, an internal technical measure of performance, fell earlier this week to 21.4, its lowest in more than nine months. A reading below 30 is typically regarded as an oversold signal.
"Everybody's underweight energy," said Voya's Zemsky. "To me that says I don't want to be underweight energy any more." (Reporting by Rodrigo Campos, editing by Linda Stern and Bernard Orr)