The industrial sector is the sixth-largest sector weight in the S&P 500. The group and its related exchange traded funds (ETFs) have been solid though not spectacular performers this year. Within the broader industrial sector, transportation stocks have also been solid.
Just look at the Industrial Select Sector SPDR (NYSEArca: XLI). The largest industrial ETF is higher by 12.6% year-to-date, good for one of the better performances among the sector SPDR ETFs. XLI’s sturdiness and similar traits for rival industrial ETFs come against the backdrop of challenges for the industrial sector.
Headwinds remain for the industrial sector. The sell-off in the oil markets has weighed on capital spending from the energy sector as producers hold off on new projects, pressuring U.S. industrial companies and sector-related exchange traded funds.
Moreover, the industrial space is being weighed down by a slowing global outlook and a strengthening U.S. dollar.
Related: Lingering Issues For Industrial ETFs
However, the charts on XLI indicate more upside could be on the way for the benchmark industrial ETF.
“Based on technical analysis, it is extremely common to see a major trendline act in tandem with a 50-day moving average to provide support on attempted pullbacks such as the one from earlier in the month (shown by the blue arrow). The strong bounce off of support levels is a clear indication that the bulls are still in control of the momentum, and active traders will likely use these levels as guides for placing stop-loss orders. Specifically, traders will likely maintain a bullish outlook on the fund until it closes below $57.14,” according to Investopedia.[related_stories]
Election year rhetoric is boosting aerospace and defense stocks, which is helping boost industrial ETFs.
Although the aerospace and defense industry is perceived as being beholden to Uncle Sam’s whims, the allure of late-cycle sectors, including industrials, in a rising rate environment remains in place. Industrials perform well when interest rates rise because rising rates can go hand-in-hand with economic growth.
In addition to political rhetoric, potential catalysts for aerospace ETFs include include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.
Industrial Select Sector SPDR
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.