There's no doubt about it, so far in 2014, the market has been
more than a little turbulent. Stocks in most of the major S&P
industry groups faltered mightily in January, only to come
roaring back in February. Now that we've entered March, many
traders are positioning themselves for more volatility on the
both the upside and the downside.
During near-schizophrenic conditions such as we've seen so far
this year, I try to look at industry groups, as well as
individual stocks and commodities, that are positioned to do well
but haven't quite kept pace with some of their
In the current market, the
Industrial Select Sector SPDR (NYSE:
fits that bill.
The fund's holdings include stalwart firms from industries
such as aerospace and defense, industrial conglomerates,
machinery, railroad, and construction and engineering, to name
just a few. Its top five holdings are
General Electric (NYSE:
United Technologies (NYSE:
Union Pacific (NYSE:
As a group, the industrials have not kept pace so far in 2014,
and XLI is up only about 1.7%. That makes sense when you consider
that the market has been led higher by the mid and small caps of
the Nasdaq and Russell 2000, rather than the blue chips of the
Dow Jones Industrial Average. The Nasdaq shows a gain of 4.6% for
the year, while the Russell 2000 is up 3.9%. Compare that to the
Dow, which is off about 1% year to date.
Yet the relative underperformance among industrials is, I
suspect, about to end, and here's why.
First, the chart below shows that XLI recently overcame
technical resistance at the previous highs around $52. Shares now
trade just under $53, which also means they are not too
overextended with respect the 50-day moving average, currently at
$51.24. To me, the latest move higher looks like smart money
momentum that's just getting started.
Momentum can be enough to push an individual stock higher even
if the fundamental catalysts aren't there, but that's not
typically the case with sectors. And it's also not the case with
large-cap stocks such as those found in XLI.
So, what are the fundamental catalysts that have me bullish on
One big catalyst is the recent uptrend in manufacturing.
According to the Institute for Supply Management (
) survey of manufacturing conditions, things are markedly
improving. The ISM index was up for the ninth consecutive month
in February to 53.2 from 51.3 in January. This bested economists'
expectations of 52.3.
As the economy, and particularly the manufacturing sector,
improves, so too will the aggregate fundamentals in the
industrial sector, which should boost XLI.
The positive fundamentals combined with the momentum buying
from fund managers looking to capture some alpha with stocks that
have underperformed on a relative basis are good reasons to go
long XLI here.
Action to Take -->
-- Buy XLI at the market price
-- Set stop-loss at $48.60, approximately 8% below recent prices
-- Set initial price target at $58.10 for a potential 10% gain in
This article originally appeared on
This Sector Looks Like It's About to Make a