The last time we look at the Basic Materials sector was May 2005. At the time, we were bearish on the sector, and these stocks did indeed remain weak for a large part of 2005. Since that issue of the Sector Spotlight, the Dow Jones Basic Materials Index has gained almost 17%, a pretty good run for just over eight months. Now we have reached a possible resistance level for this index. In March 2005 the index was not able to break above 216. As of today, its most recent close was a few points above that past high, but will it be able to hold onto that level and continue higher?

The biggest gainers for the past six months in the Basic Materials have been mainly the energy and metal companies such as Arch Coal Inc (ACI) which gained over 40%, United States Steel Corp (X) which gained over 30%, and Meridian Gold Inc (MDG) which also gained over 40%. The ones that did not do so well relative to the index were mainly the chemical companies such as Dow Chemical (DOW) and Eastman Chemical Co. (EMN) which were both down a little more then 10% for the last six months. However, while signs are still looking good for the areas that did well for the last six months, it also appears that even these two chemical companies are starting to see better days as well, by showing good earnings reports. So to answer the above question, it does appear that the Basic Materials sector is still a good bet and the gains will continue.

The chart below shows the Dow Jones Basic Materials Index. As of the Friday close, it was at 217.62 and is up slightly in the first few hours of Monday's trading. In the chart you can see the past high in March that we talked about above. In a longer-term sense you can also see how good the run has been for the last three years. While the broader markets have also done well for this time period, the Basic Materials Index has beaten the major indexes by a significant margin and we believe it will continue to do so. For example, for the last three years the S&P 500 Index has been up about 48% while the Dow Jones Basic Materials Index has shown a gain of about 79%.

If you are interested in investing your money into the Basic Materials sector, we think that a good target to shoot for on the Dow Jones Basic Materials Index would be about 250.00 while keeping a stop at the 20-week moving average. You can invest your money into any of the stocks mentionded above, or any of the other basic materials stocks available. There are also many mutual funds that invest in these stocks or you can look at the exchange traded fund that iShares has available for basic materials; the symbol is IYM.

Price Headley is the founder and chief analyst of BigTrends.com.