XLI: Not A Time To Buy

Hale Stewart profile picture
Hale Stewart
10.57K Followers

Summary

  • The macroeconomic backdrop is positive.
  • The sector's relative performance is poor.
  • The XLI's chart is weak.

Black Bull and Bear

peterschreiber.media/iStock via Getty Images

My methodology for analyzing an industry-specific ETF is to first analyze the macroeconomic backdrop of the sector to determine if the fundamentals support purchasing the ETF. I then look at the ETF's relative performance versus its peers and the charts to determine timing of a potential transaction.

The macroeconomic backdrop for the industrial sector ETF (NYSEARCA:XLI) is positive.

The latest ISM® Manufacturing PMI® was very strong (the author has written permission to use the latest month's report).

“The November Manufacturing PMI® registered 61.1 percent, an increase of 0.3 percentage point from the October reading of 60.8 percent. This figure indicates expansion in the overall economy for the 18th month in a row after a contraction in April 2020. The New Orders Index registered 61.5 percent, up 1.7 percentage points compared to the October reading of 59.8 percent. The Production Index registered 61.5 percent, an increase of 2.2 percentage points compared to the October reading of 59.3 percent.

There are, however, problems.

All segments of the manufacturing economy are impacted by record-long raw materials and capital equipment lead times, continued shortages of critical lowest-tier materials, high commodity prices and difficulties in transporting products

These issues have been reported in the financial press for some time; they are anything but surprising.

The latest report from Markit Economics confirms all aspects of the above data:

The seasonally adjusted IHS Markit US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 58.3 in November, down fractionally from 58.4 in October and lower than the earlier release 'flash' estimate of 59.1. The latest reading was the lowest since December 2020. Although remaining well above the 50.0 neutral level, the PMI was boosted in particular by the further near-record lengthening of supplier lead times and increased inventory building. While normally considered positive developments associated with an expanding manufacturing economy, the lengthening of lead times reflected an ongoing supply shock and inventory building often reflected concerns over the future supply situation.

Other economic releases further illustrates the strength of the industrial sector. The latest industrial production report from the Federal Reserve contained a solid increase:

Industrial production rose 1.6 percent in October after falling 1.3 percent in September; about half of the gain in October reflected a recovery from the effects of Hurricane Ida. Manufacturing output increased 1.2 percent in October; excluding a large gain in the production of motor vehicles and parts, factory output moved up 0.6 percent. The output of utilities rose 1.2 percent, and mining output stepped up 4.1 percent.

New durable goods orders have been a bit softer in the last two reports:

New orders for manufactured durable goods in October decreased $1.2 billion or 0.5 percent to $260.1 billion, the U.S. Census Bureau announced today. This decrease, down two consecutive months, followed a 0.4 percent September decrease. Excluding transportation, new orders increased 0.5 percent. Excluding defense, new orders increased 0.8 percent. Transportation equipment, down three of the last four months, drove the decrease, 2.0 billion or 2.6 percent to $75.3 billion.

However, the data's overall trend remains positive:

Durable goods orders crashed during last Spring's shutdowns but have since regained all their losses (Chart from the FRED system).

Despite supply-chain issues, the industrial sector is very strong, indicating that the macroeconomic backdrop supports buying the (XLI).

Let's compare the XLIs performance to that of its peers, which, in this case, would be the XLB, XLC, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY, and VNQ (a total of 11 sectors).

Week Month 3-Months 6-Months 1-year
XLI's relative performance 6th 6th 7th 10th 8th

Data from Finviz.com

There's little in the XLI's performance relative to its peers to suggest this is a good time to buy.

That conclusion is supported by an analysis of the 1-year chart from Stockcharts.com:

XLI 1-year from Stockcharts.com

For the most part, the ETF has been trading between the 99 and 106 level since May. In November, prices tried to break out. But they couldn't get much beyond the 107-108 level. Last week they dropped towards the 200-day EMA on higher volume.

While the macroeconomic backdrop is positive, the ETF's relative performance and chart indicate this is not the time to take a new nor add to a an existing position.

This article was written by

Hale Stewart profile picture
10.57K Followers
Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM in domestic and international taxation (MagnaCumLaude). He is the author of the book The Lifetime Income Security Solution. Follow me on Twitter at @originalbonddadYou can read his legal analysis on his law office's blog.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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