Industrial stocks have taken a major hit recently. The concern is the economy—and the shares are now trading at scary levels.
The
Industrial Select Sector SPDR
exchange-traded fund (XLI), home to large manufacturers such as
Honeywell
International (HON) and logistics firms FedEx (FDX) and
United Parcel Service
(UPS), is trading at about $97, down 12% from an early August record of just over $110.
They’ve dropped because the market knows the Federal Reserve must—as the bank has indicated—keep interest rates high for a while in order to cool down inflation and the economy. Eventually, that will hurt demand and limit companies’ spending on large equipment needed to build products, while waning consumer demand will hurt airlines and transport companies.
One sign that sentiment in these stocks has thoroughly broken down is that not even better-than-expected profits can lift the shares.
Caterpillar
(CAT) beat sales and earnings estimates Tuesday, but buyers haven’t stepped in. Shares are actually in the red in midday Tuesday trading, and are now down 20% from record highs set in early August.
Yet this is understandable. Caterpillar shares, like other industrial names, came into earnings up by a double-digit percentage for the past year, already reflecting the strong demand. To make matters worse, the company said its order backlog shrunk almost $2 billion year over year, which indicates waning demand for machines going forward.
It’s the type of story that’s laid the industrials ETF low. It had taken several tries over the past few years for buyers to finally come in at around $105—and they did early this summer—to lift shares. Now, selling pressure is keeping the ETF below that level. The delayed damage to the economy from higher rates is starting to show up in forward-looking indicators in companies’ earnings releases.
The selling pressure has pushed the ETF’s 50-day moving average lower. It isn’t even $1 above its 200-day moving average. In healthier trading environments, the short-term average should be significantly higher than the longer-term average because, as stocks rise, they leave older averages at lower levels. The fact that the 50-day average is almost at the 200-day average means the fund is making a convincing and sharp to the downside because the market is particularly concerned about industrial firms’ profits.
The selling will abate at some point. The last two times the 50-day moving average approached the 200-da, in 2020 and 2021, the ETF went on to see gains, and shares are still above prices from those days.
That doesn’t necessarily mean another rally from here is in store, however. Before anyone invests in industrials, they should monitor how the ETF trades in the mid-$90s level, where it’s getting close to now. It has tended to see buyers come in at that general level in the past year, but if those buyers go away soon, the next move could be to $84, the next price of “buying support.” Such a level represents a roughly 14% drop from its current price.
Watch how the fund performs around the mid-$90s level for now.
Write to Jacob Sonenshine at [email protected]
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