Industrials Sector Deep Dive

Top charts and trade ideas

The S&P 500 experienced its first monthly decline since last fall in April, and the Industrials sector was no exception.

The Industrials have come off their highs, but the decline hasn’t done any significant damage to the longer-term uptrend that’s been in place for the last 18 months. While former leaders like Tech are stuck trading below former targets, the Industrials are consolidating above theirs.

The underlying strength in the Industrials reflects underlying strength in the stock market overall. No sector is more highly correlated to the S&P 500 than the Industrials, a statistic exemplified by the performance since the bear market lows back in October 2022. Since then, the Industrials have tracked the SPX almost perfectly.

Owning the Industrials over the benchmark index hasn’t given investors much of an edge - they’ve tracked each other step for step - but below the surface, it’s a different story. If you strip out the outsized influence of market cap weightings and look instead at the equally weighted versions, the Industrials are setting new relative highs. Ever since breaking out of a 2-year base in early 2022, this ratio has been stair-stepping steadily higher.

The further you dig, the better things get. Check out the ratio of the small cap Industrials relative to the S&P 600. A breakout from a 10 year base has turned into an asymptotic rise. Every time we see this chart, we have to double-check the settings to make sure we still have the y-axis set to log scale.

Can the recent relative strength continue? Of course. We never want to discount the odds of a trend continuing.

But we’re also entering the worst seasonal period of the year for the Industrials relative to the rest of the market. Since 1990, the sector has underperformed on average in each of the next 6 months.

For the Industrials/S&P 500 ratio, ‘sell in May and go away’ has worked out pretty well.

Digging Deeper - Top Charts and Trade Ideas

Over the last year, only one Industrials industry has failed to move higher. Air Freight & Logistics has fallen more than 10%.

FedEx hasn’t exactly been blowing the doors off, but the real problem for the industry has been UPS. In the opening section we talked about how impressive it is for the Industrials as a whole to be consolidating above support within an existing uptrend. For UPS, we’ve got the exact opposite: it’s consolidating below resistance within an existing downtrend.

We’ve got the same thing for the stock on a relative basis. Yes, momentum for the UPS/SPX ratio didn’t get oversold on the most recent decline, but RSI hasn’t even approached overbought territory for the last year. This is anything but an uptrend.

Leaders

GE finished its spin-offs and changed its name to GE Aerospace, but nothing else changed. It added to its sector-leading year-to-date performance with an 18.5% gain over the last 4 weeks. Just three S&P 500 stocks have been stronger that General Electric in 2024, and one barely counts since it was just added to the index. That’s the result of a stock that just reversed a multi-year relative downtrend and is now setting 6 year highs vs. the S&P 500.

Following the spin of GE Vernova (GEV), we have to update our levels to watch. The 2007-2009 decline is what we’re using to manage risk from here, with the key level being the 61.8% retracement at $135. If GE is above that, we like it long with a target of $200.

Also among the biggest winners of the last month, Carrier Global just broke out of a huge, 2-year cup and handle base. We want to buying this breakout with a target of $74.

Losers

During bull markets, we like buying pullbacks within uptrends. That’s what we’ve got right now with Hubbell, which dropped almost 11% over the last month. Right now, the stock is just below our risk level of $380, which is the 423.6% retracement from the 2020 decline. We still want to be buying a move back above that level with a target of $560, but we can also manage risk at the 2023 highs of $330 if this pullback continues. Only a break below $330 would make us question whether this uptrend was still intact.

The reason we still like HUBB is that it continues to show strength relative to the rest of the market. The HUBB/SPX ratio just went nowhere for a decade - we think the rally still has legs.

Sometimes, though, buying pullbacks in uptrends doesn’t pan out. We’ve liked ODFL for awhile, and we believed this consolidation below the 161.8% retracement from the 2022 decline would resolve higher. But the breakout never came.

Now, the bigger question for ODFL is whether the stock will break below those prior cycle highs and begin a downtrend.

Could it find support here and rally back higher? Sure. And that’s the higher probability outcome if equities as a whole remain in a bull market. But what really concerns us is this trendline break for ODFL relative to the S&P 500. There’s no reason to be involved with ODFL until the damage is repaired.

More charts to watch

As evidenced by Old Dominion above, just because trends are more likely to continue than reverse doesn’t mean trends never reverse.

Few stocks have been worse than 3M over the last 6 years. From 2017 to the lows a few months ago, MMM lost 80% of its value relative to the rest of the market. It lagged in bull markets, bear markets, and everything in between.

Finally we’re seeing signs of life. The MMM/SPX ratio is further above its 200-day moving average that it has been at any point since 2017.

And the stock on its own just set new 52-week highs after bottoming near the 2007-2011 highs.

This isn’t one we want to own blindly - it could very easily turn this into a failed breakout and recapture its long-term loser status - but the risk/reward is intriguing. We can be buying MMM above $95 with an initial target of $125.

Builders Firstsource is in a monster uptrend relative to the S&P 500. Nothing we’ve seen this year changes that.

On an absolute basis, BLDR is consolidating below the 423.6% retracement from the 2022 decline, following a bearish momentum divergence at the highs. On the pullback, though, momentum has stayed out of oversold territory, telling us that the bears don’t really have control. We like it on a resumption of the uptrend above $200 with a target of $300.

Much like the Industrials sector overall, United Rentals is consolidating above a key Fibonacci retracement level. And earlier this week, URI set an all-time high compared to the rest of the market. Relative. Strength.

We want to be buying it above $650 with a target of $900.

The same goes for peer Caterpillar as it tests the 423.6% retracement from the 2019-2020 decline: as long as CAT is above $335, we can buy it with a target of $485.

That’s all for today. Until next time.