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Daily Data: Industrial Select Sector SPDR (XLI)

Industrial stocks have continued higher since I wrote about them on February 29th in Industrial Stocks for February-April. Now it's time to revisit these top 10 stocks listed in XLI and see if there is any seasonality that suggests trading from March-May:

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The table above shows the absolute best/worst returns of the top 10 holdings in XLI, which are General Electric (GE), Caterpillar (CAT), UPS (UPS), United Tech (UTX), 3M (MMM), Union Pacific (UNP), Boeing (BA), Honeywell (HON), Emerson (EMR), and Deere (DE). Based on the 10 year best/worst returns, I have estimated the maximum high/low price of each stock for May'18. This is not to be understood as to where I think the stock will go by May'18, but instead where I think the stock will not go by May'18. In order for any of these stocks to reach my estimated maximum high/low prices on May'18, investors would have to show an unprecedented amount of buying/selling to break the 10yr maximum return range.

To save you time, I added the average return to the worst return (highlighted below). This column will help you identify which stocks performed the best relative to their draw-downs during this period.

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Technically, for trade ideas I would strongly suggest looking at the tickers in the green having positive Average+Worst return characteristics. As you may conclude, United Postal Service, Boeing, and Honeywell have historically been the best performing stock from March-May expiration in terms of average return to maximum draw-down.

Moving on to fundamentals, we see below that based on the P/E ratio minus the 5 year EPS growth rate, CAT is the best value right now. Notice how I have shaded the cells in (P/E - 5yr EPS) red or green based on whether P/E ratio is greater or less than the 5 year EPS growth rate. We want to see a negative number (P/E ratio below the 5 year EPS growth rate) shaded in green to show that the stock has value.

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Caterpillar is the only stock listed above that is trading at a significant value relative to its 5 year EPS growth rate.

Suggested Trade: Caterpillar

Technical data above suggests that the average return for Caterpillar is only slightly below the largest draw-down for the past 10 years. Having the average return below the maximum draw-down is not good, but I favor Caterpillar because using its current P/E ratio, the stock seems to be significantly undervalued relative to its forward 5 year EPS growth rate. Additionally, relative to its estimated maximum down of $104.76, CAT is very attractive for entering new bull put spreads at or below the $105 level.

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I favor the following trade because the $97.50 level stands as significant support from the December breakout line. Further, the 200 SMA adds additional support to the breakout line in case of a market pull back. This trade is very attractive and we may initiate it this week. Once again this position is not large (it's less than 10% the size of the portfolio), and the stop loss of 0.82 almost gives us a risk reward of 1 to 1.

Option Trade: CAT - Sell May'18 97.50/95 put spread (Bull Put Spread)

  • (Sell 97.50 Put/Buy 95 Put)

  • Size - 7% of Giorgio's Corner Portfolio Size = (3 spreads)

  • Entry: Sell Limit: 0.40

  • Stop Loss: 0.82

  • Exit Price: 0.00

  • Max Return: 19.04%

(Note: Return calculation does not include commission; Maximum Return is calculated as Return at Risk not Return on Margin)

Additional Trade Ideas:

The only other trades I would suggest besides CAT are the following:

  • May'18 BA 67.50/65 bull put spread for a sell limit of 0.25 with a stop loss of 0.55

  • May'18 HON 57.50/55 bull put spread for a sell limit of 0.50 with a stop loss of 1.10

Charts are from Finviz.com

Disclosure: I do not own any investments in GE, CAT, UPS, UTX, MMM, UNP, BA, HON, EMR, DE, or XLI. I own long shares of BIDU. I'm short shares of UVXY, GLL, GOOG and ZSL. I own bear call spreads on SPY, VXX, GLL, and ZSL.

Disclosure: I may initiate a long position in CAT, BA, HON over the next 72 hours.

Source: Historical Data Suggests Industrial Goods Weak Through May, Caterpillar Strong