ETF Insights| October 1, 2024
Price Action & Performance
XLI performance corrected sharply from April 25 through July 10, but we have seen persistent signs of bullish reversal since then. September saw the sector resume recent outperformance vs. the S&P 500 after a flat August. Oscillator work skews bullish with the MACD on a buy signal and the RSI study near overbought levels and the relative curve vs. the S&P 500 about to go positive over the trailing 12-month period.
Industry level performance within the sector has improved broadly over the past 3 months with 9 out of 11 GICS sectors outperforming the S&P 500 since July 1. Building Products, Trading Co.’s & Distributors and Construction & Engineering industries currently lead the sector with Air Freight and Commercial Services industries lagging near-term.
At the stock level, larger names have been slightly better than smaller ones from a technical perspective, but we are starting to see improvement in the average stock. Our favorite stocks within the Sector are AXON, LMT, HWM, TDG, BLDR, CARR, TT, PWR, ETN, HUBB, MMM, PH, PNR, WAB, CTAS 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. Commodities price near-term strength is likely a bullish catalyst for the sector.
Themes like “onshoring” have benefited the sector as global supply chains have been contracting due to sanctions on Russia and China relating to the war in Ukraine and unfair trade practices respectively. 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, Construction & Engineering stocks and 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. This should 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 +2.24% allocation above the benchmark S&P 500.
Chart | XLI Technicals
- XLI 12-month, daily price (200-day m.a.| Relative to S&P 500)
XLI Relative Performance | XLI Industry Level Relative Performance | Trailing 3-Months
XLI Street Analyst Ratings and Price Targets:
Data sourced from Factset Data Systems
