Montreal, Canada

The materials sector is now frothy. For value-based investors in the natural resources complex, now is the time to switch from expensive basic materials stocks into energy stocks – especially the oil drillers and junior and mid-cap oil and gas companies.

Copper, which ranks as the most widely followed among base metals, has begun a correction along with most of the complex since Tuesday. The correction has been quite modest by historical standards, with most companies still only a few points below their all-time highs recorded last month.

Copper prices are down just over 1% from their December 31 close. That’s hardly a decline. The precious metals space, however, is falling harder, with gold prices off 3.5% this month and silver down 6%. Mining stocks have been slammed this week.

In 2010, basic material stocks in the United States gained 31% while the oil and gas sector grew by 18.5%. The only laggard in the resource space last year belonged to aluminum – down almost 4%.

Some warnings signs are brewing for copper.

Commercial traders of copper futures contracts are net short to the largest degree in several years, according to the CFTC (Commodity Futures Trading Commission) and The McClellan Market Report.

Commercial traders are typically the “smart” money; these boys are now betting heavily that copper prices will tank. The net short position shows the highest degree of negative bets since twelve months ago – just ahead of a big market-wide correction triggered by Greece.

Energy, however, is a good value play in 2011. The sector lagged other resources last year and natural gas should continue to muster a counter-trend rally after months of protracted selling, if only for a few months. The big play is crude oil. With OPEC keeping supplies at current production levels and demand steadily rising to about 86 million barrels per day, the market is growing tight.

Look at the U.S. and Canadian drillers. I find this sector very attractive for a host of reasons, namely a very competitive tax regime for energy companies in Canada compared to the United States, increasing drilling activity in the oil sector and valuations far more compelling on both a relative and absolute basis compared to the materials sector.