Industrials stocks continue to improve at a steady pace. We prefer XLI to XLB and XLE in our work.
Price Action & Performance
XLI performance corrected sharply from April 25 through July 10, but we have seen signs of bullish reversal since then. The XLI has recently broken out to the upside on price getting through resistance at the $129 level. Since the low on July 10th, the XLI has outperformed the S&P 500 by > 5%. Oscillator work is showing a buy on the MACD, and a near-term overbought reading on the RSI, but given the bullish reversal pattern playing out over the intermediate term, we view this as a positive for the sector.
At the Industry level we’ve seen improvement as well. Road & Rail stocks are making a near-term bullish reversal relative to the broad market as has the Aerospace & Defense Industry and the Machinery Industry. Longer term leadership like the Electrical Equipment, Building Products and Construction and Engineering Industries have perked up as well and Industrial Conglomerates and Commercial Services Industries are also exhibiting outperformance trends vs. the broad market.
At the stock level, larger names have been slightly better than smaller ones from a technical perspective. Our favorite stocks within the Sector are AXON, LMT, HWM, TDG, TT, PH, WAB, CTAS, RSG and LDOS.
Economic and Policy Drivers
XLI has faced some macro headwinds from weak commodities prices and falling rates. Historically the sector does better when both are rising. However, themes like “onshoring” have benefited the sector as global supply chains have been contracting due sanctions on Russia relating to the war in Ukraine. There is also the continued convergence of the Chinese/Russian political block as it seeks to act as a counterweight to US interests globally and press its own agenda on Ukraine, Taiwan, the South China Sea and North Korea. This new geopolitical status quo has boosted the Aero/Defense Industry as well as Building Products stocks Trading co.’s.
On the fundamental side, supply chain issues continue to crimp margins for many industrial businesses. Manufacturing wages have continued their steady climb despite plateauing Industrial Production. Trade policies and Tariffs are adding to uncertainty with the Geo-Political environment continuing to be fraught with tensions around the “Hot Wars” in the Middle East and Ukraine and the ongoing “Cold War” between the US and China. Finally, theoretically salutary policies like the CHIPS and Science Act and the Inflation Reduction Act which have aimed to reduce reliance on the global supply chain have had some lagged effects which have dampened optimism in the near-term. It appears investors are betting on lower rates to spark increased commercial and industrial lending, as well as ameliorating elevated labor and financing costs to set up a ramp for marginal fundamental improvements for the sector moving forward.
In Conclusion
We are remaining long XLI on expectations that implementation of Dovish Policy, Geopolitical tailwinds and a broad array of business lines will insulate the sector from downside risks. We start September OVERWEIGHT XLI with a +2.06% allocation above the benchmark S&P 500.
Chart | XLI Technicals
- XLI 12-month, daily price (200-day m.a.| Relative to S&P 500 | MACD | RSI)
- The recent break-out on price from intermediate-term consolidation has us viewing near-term overbought conditions more favorably for XLI
XLI Relative Performance | XLI Industry Level Relative Performance | 1yr
Data sourced from FactSet
