Chemical Stocks Rise Amid Improved Manufacturing Activity

As the major indexes continue to make new highs, chemical stocks trail the S&P 500 by around 4% as investors fret over the recovery of the group's end market industrial customers. However, those fears were somewhat eased Tuesday after data released by the Institute for Supply Management revealed that the manufacturing purchasing managers' index (PMI) reached 56 in August to notch a 19-month high, as new factory orders hit their highest level in 16 years.

"As the economic recovery continues, I think you will see a broadening of the stocks participating in this rally," said an equity strategist, per CNBC.

Key Takeaways

  • New factory orders hit their highest level since 2004.
  • Air Products and Chemicals, Inc. (APD) broke out from an ascending triangle on above-average volume, indicating participation from larger market players.
  • Dow Inc. (DOW) rallied from the top trendline of a three-month ascending triangle, which could be a catalyst for further gains.

Traders who follow chemical stocks should add these two industry-leading stocks to their watchlist. Both topped Wall Street's quarterly earnings forecasts and have shown relative strength compared to their industry peers. Below, we'll take a closer look at each name and explore several trading ideas.

Relative strength is a technique used in momentum investing and identifying value stocks. It consists of investing in securities that have performed well relative to their market or benchmark.

Air Products and Chemicals, Inc. (APD)

Air Products and Chemicals provides specialty gases and associated equipment to customers in the chemicals, energy, health care, metals, and electronics industries. Although the Allentown, Pennsylvania-based company's fiscal third quarter adjusted earnings of $2.01 per share declined 8.6% from a year earlier, the figure came in two cents ahead of the Street expectation. Management cited the successful execution of the company's growth strategy for the earnings beat. Trading at $302.73, with a market capitalization of $66.87 billion and offering a 1.83% dividend yield, the stock has gained 25% over the past three months, outpacing the sector industry average during the same period by nearly 6% as of Sept. 2, 2020.

After trading sideways within an ascending triangle pattern for the past month and a half, the stock staged a breakout Tuesday to an all-time high. The move occurred on above-average volume, indicating participation from larger market players. Furthermore, the moving average convergence divergence (MACD) indicator recently crossed above its trigger line to generate a buy signal. Those who position for upside continuation should consider using a fast period moving average to book profits. To use this strategy, stay in the trade until the price closes beneath the indicator.

An ascending triangle is a chart pattern used in technical analysis. It is created by price moves that allow for a horizontal line to be drawn along the swing highs and a rising trendline to be drawn along the swing lows. 

Chart depicting the share price of Air Products and Chemicals, Inc. (APD)

Dow Inc. (DOW)

With a market value of $35 billion, Dow produces and sells diversified chemicals for consumer care, infrastructure, and packaging markets in the United States and internationally. The chemical maker posted a quarterly loss of 26 cents per share for the second quarter; however, the metric came in ahead of the 30-cent loss analysts had expected. Revenues of $8.35 billion declined from $11.01 billion in the year-ago quarter but topped the consensus estimate by 4.91%. The company has flagged a reduction in its global workforce and the offloading of uncompetitive assets to reduce operating expenses. As of Sept. 2, 2020, Dow stock issues a healthy 6.08% dividend yield and is trading 24% higher since early June.

Dow shares rallied from the top trendline of a three-month ascending triangle in Tuesday's session in a move that may act as a catalyst for further follow-through buying in the weeks ahead. Also, the 50-day simple moving average (SMA) crossed above the 200-day SMA last month – a signal that often marks the start of a new uptrend. Those who buy at current levels should aim to lock in profits near major overhead resistance at $52.50. Guard against a sudden price reversal by placing a stop somewhere below crucial support at $45.

Resistance is the level at which the the price of an asset meets pressure on its way up by the emergence of a growing number of sellers who wish to sell at that price.

Chart depicting the share price of Dow Inc. (DOW)

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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