U.S. industrial stocks offer the potential for attractive risk-adjusted upside returns over the near-term.
U.S. industrial stocks offer appeal at present for several reasons. The sector includes a number of well established companies such as General Electric (GE), United Technologies (UTX), Union Pacific (UNP), 3M (MMM) and Boeing (BA) among many others, providing portfolio diversification from a single holding via the Industrial Select Sector SPDR (XLI). This segment of the market also has a very high correlation of 0.95 with the broader S&P 500 Index. Thus, if the stock market continues to rise it will likely be accompanied by the XLI. But a particular appeal of owning the XLI at present is the fact that it provides a concentrated exposure to the more cyclical areas of the U.S. economy and leans away from the more commodity driven and interest rate sensitive sectors that are facing greater downside pressures in the current environment.
Industrial stocks also set up generally well from a technical standpoint. First, industrial stocks remain in a well-established uptrend with the XLI reaching new all-time highs in recent days. As a result, the sector enjoys the benefit of a number of tested technical support levels at current prices including its upward sloping 20-day, 50-day and 100-day moving averages. Industrial stocks have also been grinding in recent days just above the very top of its current trading channel, and with solidly bullish relative strength and accelerating momentum, industrials appear poised to soon break higher into a new trading channel.
A long position was recently established in Industrial stocks via the Industrial Select Sector SPDR (XLI). The initial upside target is set at $47.17, which would be the initial target for the top end of the new higher trading channel and represents +6% upside from the initial purchase price at $44.58 per share. The initial time horizon on the position is between 15 to 45 days. Initial downside tolerance is set on the position first at the upward sloping 50-day moving average that is now at $43.30 and represents -3% downside from initial price levels and then at the 100-day moving average that is currently at $44.23 and represents -5% downside from inception. It is worth noting that both trendlines are upward sloping, which will diminish the downside potential as these support levels continue to rise. All of these initial target levels will be subject to adjustment and fine tuning as the position evolves going forward.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.