Prognosis for Industrial ETFs Grows Grim

Already fragile industrial stocks and exchange traded funds continue to flash less-than-encouraging signals. Over the past week, the Dow Jones Industrial Average is off more than 3% with some of the blue chip index’s marquee industrial names among the worst offenders.

Major industrial ETFs have been only slightly better. The Industrial Select Sector SPDR (NYSEArca: XLI) and the Vanguard Industrials ETF (NYSEArca: VIS) are each lower by 2.5% over the past week while the iShares U.S. Industrials ETF (NYSEArca: IYJ) has shed 2.3%. All this at a time when investors would typically be favoring late-cycle, value sectors, such as industrials. [Industrial ETFs Look Flimsy]

The result of the aforementioned glum price action for industrial stocks and ETFs is a worsening near-term technical outlook.

“XLI recently hit a Fibonacci extension level based upon the 2009 lows and the 2011 highs. At the same time this key Fib level was being hit, momentum is reaching levels last seen in 2007. In June the ETF created a monthly bearish wick, followed by a decline last month, taking it below support line (1) by a small percentage. This support line gains a little added importance with momentum reaching levels last seen in 2007,” according to Chris Kimble of Kimble Charting Solutions.

Kimble notes price action in XLI’s top-10 holdings, which mostly mirror those of VIS, will be critical going forward. That much is certainly true as four of the top-10 holding in XLI and VIS – United Technologies (NYSE: UTX), 3M (NYSE: MMM), Boeing (NYSE: BA) and Caterpillar (NYSE: CAT) – are also top-10 Dow holdings. [Danger for the Dow ETF]

Entering Tuesday, just one of XLI’s top-10 holdings, Lockheed Martin (NYSE: LMT), had traded higher over the past month. Intensifying weakness in industrial stocks is one explanation as to why XLI, VIS and IYJ have lost over $2.1 billion combined since the start of the third quarter.