An Outlook for the U.S. Industrial Sector
The U.S. Industrial sector is approaching its period of seasonal strength. Will the seasonal trade work again this year?
The S&P Industrial sector consists of a wide variety of industrial companies including aerospace & defense, building products, construction & engineering, electrical equipment, conglomerates, machinery, commercial services & supplies and transportation. Top ten holdings are General Electric, United Technologies, United Parcel Services, 3M, Caterpillar, Boeing, Emerson Electric, Honeywell International and Cummins.
According to Thackray’s 2011 Investor’s Guide, the sector has two periods of seasonal strength: from October 28th to December 31st and from January 23rd to May 5th. The first period has been profitable in 18 of the past 21 periods for an average return per period of 6.3% plus dividends. In contrast, the S&P 500 Index gained an average of 5.0% per period. The second period has been profitable in 17 of the past 21 periods for an average return per period of 6.4% plus dividends. In contrast the S&P 500 Index gained an average of 4.3% per period. When combined, the two periods were profitable in 20 of the past 21 periods for an average return per period of 13.1% versus a 9.6% return for the S&P 500 Index. Strength in the sector is related to anticipation of seasonal peaks in earnings and revenues during the fourth quarter and first quarter. Longer term seasonal investors may choose to buy the stock in late October, ignore the gap in January and take profits in early May.
What about this year? The seasonal trade is lining up well this year. Political uncertainty related to the U.S. mid-term election will dissipate after November 2nd when results become know. The U.S. Federal Reserve’s Open Market Committee Meeting to be held on November 3rd appears destined to launch a second quantitative easing program valued at as much as one trillion dollars to stimulate economic growth. The Industrial sector is highly sensitive to changes in economic growth.
The technical outlook currently is mixed. On one hand the S&P Industrial Index, currently near 278, has established an intermediate uptrend and trades above its 50 and 200 day moving averages. On the other hand, the Index recently failed to move above long term resistance at 292.23 and short term momentum indicators recently peaked at overbought levels. Support is indicated at 239.46. A short term return to near its 50 day moving average, currently around 264, combined with technical signs of a short term bottom could provide an entry level for this year’s seasonal trade.
The easiest way to invest in the sector is to own Industrial SPDRs (XLI). It holds a basket of industrial equities that are part of the S&P 500 Index. Other available ETFs that track the sector include iShares Dow Jones U.S. Industrial Sector Fund (IYJ) and Vanguard Industrial VIPERs (VIS).
Industrial Sector Seasonal Chart
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