From the Desk of Alfonso Depablos @Alfcharts
In today’s post, we’re talking about a group of stocks that have emerged as the ‘Generals’ of the current bull market.
You are thinking, “it must be tech.”
It’s not.
Industrials have been just as strong as tech stocks but with far better internals. No other sector has experienced the kind of broad participation we’re seeing from industrials. These are the real market leaders.
Historically, the Industrial sector is the one with the highest correlation to the overall market. So, the strength of these stocks is also sending us very bullish information about the health of this bull market.
This is great news, but today’s note is about looking under the hood and finding the best opportunities in the various industrial subgroups.
As one of the most diverse sectors, investors have plenty of options in the world of industrials. We did the work and dug into this space to find out what the strongest areas are and where we want to put our money.
Let’s get into it.
Here’s the Large-Cap Industrial Sector $XLI breaking out of a multi-year base:
Consolidations tend to resolve in the direction of the underlying trend. That’s exactly what’s happening right now in industrials.
As long as we’re above 108, the bias is to the upside for this leadership sector. We’re targeting 145 over the next 6-12 months.
As you can see in the next chart, the relative trend is resolving higher as well, with a sharp rally to new all-time highs:
This ratio chart is comparing large-cap industrial stocks to the S&P 500 on an equal-weight basis.
This 15-year base resolving higher tells us we should expect more outperformance from these stocks in the future.
And unlike just about every other sector these days, industrial stocks are also showing impressive strength and leadership as we move down the market cap scale.
For example, here we have the S&P Mid-Cap Industrial Sector trading at new all-time highs:
Notice how this one looks just like XLI, back above its prior-cycle highs.
After two years in a base-building process, the bulls are back in full control.
The bias is higher for mid-cap industrial stocks as long as this base breakout is intact. 1,780 is the level.
Not only does the absolute trend look great, but mid-cap industrials are also trading at fresh highs relative to peers.
Here’s the ratio chart:
Even the Small-Cap Industrials ETF $PSCI is ripping higher out of a base:
Not all small-cap stocks can say this right now. In fact, industrials are the only ones.
Even small-cap technology $PSCT has not been able to reclaim the prior cycle highs.
This strength we’re witnessing down the cap scale is one of the reasons industrials are the ‘generals’ of this bull market cycle.
So as long as PSCI remains above its former highs around 100, the bias is higher.
The relative chart shows a strong uptrend that favors industrials over the broader small-cap arena:
Base breakout in 2022, and up and to the right since.
So what have we learned so far? Let’s recap.
When it comes to industrials, the charts are at all-time highs regardless of the market cap.
Not only is there broad strength in this sector, but there is also broad leadership.
Whether we’re looking at large caps or SMIDs, the relative trends are also at record highs!
Now, let’s talk about some of the individual industry groups within industrials.
We’ll start with the US Transportation ETF $IYT, which looks ready to follow the path of the rest of the sector.
As you can see, buyers are finally absorbing all the overhead supply at the upper bounds of this multi-year consolidation.
As long as prices are above 265, the risk is to the upside, and we’re targeting 357.
Here’s the Dow Jones Trucking Index ‘driving’ the transportation sub-group higher:
After a breakout in 2020, prices climbed in an almost vertical line, achieving two targets along the way.
Following an orderly selloff during the 2022 bear market, truckers climbed all the way back toward the 2021 highs.
Last month, price emerged higher, indicating a new up-leg is underway.
Next, we have the Dow Jones US Railroad Index resolving higher from a bearish-to-bullish reversal:
With a rounding bottom pattern complete, the path of least resistance is higher for this procyclical group.
How about the Dow Jones Commercial Vehicles & Trucks Index?
Like truckers, this is another relentless uptrend trading right around all-time highs.
Sticking with the transports theme for now, the Dow Jones Marine Transportation Index appears to be making a valid upside resolution:
As long as price remains above 2,490, this breakout is intact.
Next up, we have the iShares US Aerospace & Defense ETF $ITA:
In December, ITA broke out of a massive consolidation, reclaiming the pre-pandemic highs.
In the first few weeks of the year, it pulled back but found support at former resistance.
Our line in the sand lies at 120.
If we’re above those old highs, the bias is to the upside. We’re targeting 159 over the next 6-12 months.
To be clear, a break back below 120 would form a failed breakout. We don’t want to be involved if this happens.
Next is the Dow Jones Industrial Engineering Index:
If it’s above the 2021 highs, this is another group where we want to be looking for long opportunities.
Similar to the previous chart, the Dow Jones Industrial Machinery Index has been stair-stepping higher and consolidating constructively along the way for over a decade.
If it’s above 980, this group is giving us the green light as well.
Here’s the Dow Jones Construction & Materials Index:
Another new all-time high.
The same is true for the Dow Jones U.S. Heavy Construction Index:
Record highs!
And it’s the same story for the Dow Jones Building Materials & Fixtures Index:
Just like the others, the 2021 highs have been reclaimed.
Next, we have one of the strongest industrial subgroups, the Dow Jones Industrial Suppliers Index:
This index has been relentlessly stair-stepping higher ever since breaking out of a monster base in 2020.
Look this monster base breakout in the Dow Jones U.S. Diversified Industrials Index:
The bigger the base, the higher in space is how we learned it.
Then we have the Dow Jones Industrial Goods & Services Index:
Price has been carving out a basing pattern for over two years. Buyers continue to work on absorbing all the overhead supply at this resistance zone.
If and when they do, get ready for a new leg higher. Why should this one end up looking any different than the rest?
Take a look at the Dow Jones U.S. Business Support Services Index:
Our bet is that this index resolves in the same direction of its peers, which is higher.
The Dow Jones Waste & Disposal Services Index just resolved higher from a multi-year base:
So what do all these new highs tell us?
It’s not just strength across the market cap scale that makes industrials stand out as the clear market leaders.
It’s also the pervasive strength we’re seeing when we drill down to the industry groups.
All these new highs are evidence of overwhelmingly bullish internals for industrials.
And those internals look even better when we dive one step further into the individual components.
Let’s take a look at some of them now and outline our favorite trades:
Premium Members can log in to access the Trade Ideas in our favorite Industrials names. Please login or start your risk-free 30-day trial today.
Our first setup of the day is a $5.7B manufacturer of various industrial metal and plastic products.
Here’s Mueller Industries Inc. $MLI:
Mueller Industries resolved higher from a 4-year base in early 2021 and has taken out two of the Fibonacci extension levels. We want to bet on a continuation of this trend and define our risk at the 261.8 extension level.
With the stock above our desired entry, we only want to buy weakness back towards 44. We want to own MLI above 44, with a target of 66 over the coming 3-6 months.
Our following setup is a $9B company that installs various mechanical and electrical systems, Comfort Systems USA Inc $FIX:
Comfort Systems resolved higher from a 30-month base in 2021 and has been screaming higher since then.
We want to own FIX above 250, with a target of 388 over the coming 3-6 months. Secondary target of 611 over longer timeframes.
Our third setup is an $8.7B industrial services company, APi Group Corp. $APG:
APi Group completed a 17-month base last June and has achieved its first objective.
We want to own APG above 35, with a target of 49 over the coming 3-6 months.
Here’s Otis Worldwide $OTIS:
We like this one long above 93 with a target of 111 and secondary objective of 141.
Next, we have Huntington Ingalls Industries Inc. $HII:
Huntington Ingalls has put the finishing touches on a 6-year base and looks poised to make a fresh leg higher.
We want to own it above 280, with a target of 369 over the coming 6-12 months.
Here’s VSE Corp. $VSEC:
VSE Corp. has completed a 6-year base with authority and is printing fresh all-time highs.
We want to be long VSEC above 60, with an initial target of 88 over the coming 3-6 months. Over longer timeframes, we’re looking at a secondary objective of 134.
Next we have J.B. Hunt Transport Services Inc $JBHT, a $22B trucking company:
J.B. Hunt Transport Services is carving out a 2-year consolidation within the context of a primary uptrend.
We want to buy JBHT on strength above 218, with a target of 306 over the coming 6-12 months.
Our final setup is a $1.8B company that provides coating solutions for various industrial metals.
Here’s AZZ Inc $AZZ:
AZZ Inc has completed a 7-year base and is printing fresh all-time highs.
We want to buy AZZ above 68, with a target of 98 over the coming 3-6 months.
These are the strongest stocks in the Industrial sector with the most attractive risk/reward setups right now.
These trade ideas are an excellent representation of the broad strength from this group as they come from all different industries and in all different sizes.
While we’ll keep paying close attention to this group, as we expect continued rotation between subsectors, the more important thing for us is how broad and pervasive the strength from industrials is.
As long as the primary trends keep pointing up for the various industry groups, we don’t want to overthink which ones we want to be in.
There are great-looking setups coming out of just about all of them. We simply want to buy the best ones.
As for what it means for the overall market… Put simply, the bulls are in full control. And until these ‘generals’ fall, we don’t think the broader market will.
As always, we love to hear from you, so shoot us a note and let us know what you think.
Alfonso
Be the first to comment