Industrial stocks and sector-related ETFs tanked Wednesday after industry giants Caterpillar (etftrends.com/quote/CAT) and 3M (etftrends.com/quote/MMM) projected a bleak global outlook.
On Wednesday, the Industrial Select Sector SPDR (NYSEArca: XLI) declined 1.7% and SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) decreased 0.9%.
“When you look at a chart of the XLI, you can see very clearly that a double-top has been made here,” Craig Johnson, chief market technician at Piper Jaffray, told CNBC, referring to a traditionally bearish pattern developing in the popular S&P industrials ETF.
“From here, we’re going to have to at least come down and look at the mid-60s, if not kind of a measured objective for me would put this industrial ETF down into the $60-range. I think we’re going to see more weakness ahead in this, and I look at this and I view this as a bit of an indicator of the overall market. So at this point in time, I’m still cautious on the industrials, and definitely cautious on the XLI,” Jaffray added.
Reasons Behind Weakened Sector
The sector weakened Wednesday after 3M cut its full-year earnings forecast and Caterpillar pointed to rising costs due to increased material and freight costs, which have been largely associated with increased tariffs and steel prices.
CAT shares fell 3.4% and MMM shares dropped 3.6% on Wednesday. CAT makes up 3.2% of XLI’s holdings and 5.2% of DIA. MMM accounts for 5.2% of XLI and 5.2% of DIA’s portfolios.
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Some associated the pullback in the industrial sector to concerns that global economic growth has peaked. Consequently, more investors could be pricing in weakness or even a recession ahead.
“Most investors are working with the base case scenario of a recession sometime in either 2019 or 2020,” Rizk Maidi, an analyst at equity research firm Berenberg, told Reuters. “People are just hunting for any data point to confirm that the earnings have peaked.”
For more information on the industrials sector, visit our industrials category.