XLI Industrials SPDR June Outlook—Industrials had a rough month in May but are now back to near-term support in both absolute and relative terms.
Price Action & Performance
XLI looked set up for success entering May only to fall on its face as economic concerns entered the picture and natural resources exposures slumped on weak Crude oil performance. 7 out of the 12 large cap. industrials continue to outperform the S&P 500 over the past year, but 11/12 of those industries either lost ground or were flat vs. the benchmark in May. The sector in aggregate is now sharply oversold and we are looking to take an opportunistic long this month to capitalize on potential reflation. Typically, sustained outperformance and sudden underperformance is a signature of a bull trend, and we will be “dip buyers” in June. Hopefully we won’t be dips a second month in a row…
Economic and Policy Drivers
Inflation is a dominant theme across all sectors, but with very different implications. XLI outperformance would likely be driven by a hotter inflation print and a strong Q2 earnings season. Industrials is a broad sector which explains why it often performs in the middle of the pack. The many different business lines within the Sector often take their cues from different macro inputs. For example, Airlines do better when Crude Oil prices are falling generally, while Rails do better when Crude Oil prices are rising. 2 big policy themes are animating the sector at present. The aforementioned inflation theme, and the continued onshoring of supply chain from China et al. to US as economic sanctions remain in place between the two countries. This has been a broad tailwind to Industrials which is one of the only sectors to see sustained outperformance in small and mid-cap. tiers over the course of the post-pandemic cycle. This theme has dovetailed with inflation to create some powerful tailwinds behind certain industries within the Industrials sector. May inflation came in a bit cooler than expected and sparked rotation away from Industrials. We think the odds are in the sector’s favor in June.
How Can XLI Help?
XLI is a powerful tool for Industrials investing. It allows an extremely cost-effective way to get the very broad exposure the sector offers all in one instrument. If this month’s inflation print is hot, Sanitation services like RSG and WM, as well as Machinery plays like CAT and DE should benefit. Investors might also find the fixed government contracts of RTX, GD and LMT etc. attractive. If inflation comes in cool, there are several areas of the sector that respond positively to lower rates as well like Building Products which ties into the lack of supply that has been driving homebuilders and home price appreciation. Airlines would likely do well if inflation eases, and the consumer gets some confidence. There are also several AI plays in the sector like ETN and PH which have benefited from the enormous NVDA halo over the last 12+ months.
In Conclusion
We are remaining long XLI as it is deeply oversold near-term and tactically attractive if we see profit taking from L/T winning sectors XLK and XLC. We also like it as a partial hedge to our short position in XLE. Our Elev8 Sector Model debuts with an OVERWEIGHT in XLI of 2.46%
Chart | XLI Technicals
- XLI 12-month, daily price (200-day m.a.| Relative to S&P 500)
- Price has near-term support at the $120 level. The relative curve is back to levels where previous reversion has occurred and ended May with a strong daily bounce
