The Deep Dive

Industrials

Good morning,

This week we’re going deep on the industrials sector. As I mentioned yesterday, one of the most concerning developments for the market recently has been a dramatic break in industrial stocks. They are highly cyclical, historically very correlated to the S&P 500 Index, and had been leadership coming into 2023.

However, a number of those previous leaders now look like they have suffered large false breakouts, so I wanted to provide a more in-depth look at the group and the implications of further weakness.

Specifically, this report will cover:

• The top-down technicals of the industrials sector

• Relative strength within key subgroups

• Big movers at the individual equity level

• and why the recent action has echoes of 2008

Let’s dive in!

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Top-down view

Absolute set-up of XLI

The big-picture absolute view of the industrials sector is neutral. While an eventual breakout above $108 would be extremely bullish, the sector acted incredibly poor at its recent test of $104. If below that, it is hard to be tactically bullish on the sector. First support comes in at $95 and the 200-DMA.

Relative chart so bad it is good?

The biggest break in the industrials sector has been the relative performance over the past 4 months. Since January 6, the sector has underperformed the S&P 500 by 8%, pushing the XLI:SPY ratio below its 200-DMA and out of a clear uptrend. However, as the chart below shows, industrials have outperformed the S&P 500 on average following extreme oversold readings like we have right now.

Internal trends rolling over