XLI: Great Economic Backdrop But So-So Charts

Dec. 17, 2021 4:43 PM ETIndustrial Select Sector SPDR ETF (XLI)
Hale Stewart profile picture
Hale Stewart
10.57K Followers

Summary

  • The macroeconomic backdrop is positive.
  • The longer-term charts show consolidation.
  • The shorter-term charts show a modest move lower.

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Whenever I analyze and ETF that tracks a sector, I first analyze the sector's macroeconomic backdrop to determine if it's expanding or contracting. I then look at the index's chart to determine if it's an appropriate time to buy (when the economy is expanding) or sell when the economy is contracting.

Investment thesis: while the economic backdrop is strong, the charts aren't signaling a buying opportunity.

Overall, the industrial sector is in great shape. Here's the key data from the latest ISM® manufacturing report which the author has written permission to use:

“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.

The data is structured so that a reading of 50 delineates an expansion from contraction. A reading at or near 60 is considered very strong.

The latest Markit Economics report (which also structures its data with 50 dividing expansion from contraction) was also positive.

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.

Both reports also noted that price pressures are pronounced and that supply-chain issues are still a big problem.

Let's flesh out the above data with additional information from the FRED system.

New orders for durable goods (left) recently peaked at a level higher than before the recession. The data has trended modestly lower since. New orders excluding transportation orders (new orders ex-Boeing) have moved sharply above pre-pandemic levels.

Non-defense capital goods excluding aircraft (which is used as a proxy for manufacturing equipment) have continued to increase since the very end of the recession.

Industrial production (left) quickly rebounded after the recession and has regained the majority of its losses. Capacity utilization (right) has also returned to pre-pandemic levels.

The ETF is poised to outperform the SPY:

The relative rotation graph from StockCharts using daily data shows that the XLI is in the improving sector.

The relative rotation graph from StockCharts using weekly data also shows that the sector is strengthening.

Now let's take a look at the charts, starting with a longer-term view:

2-year chart with weekly bars (left) and 1-year chart with daily bars (right) from StockCharts.com

The weekly chart (left) shows a very strong rally that started in March of 2020 that lasted nearly a year. Since then, prices have been trending sideways, consolidating gains. The 1-year chart (right) shows the consolidation in a bit more detail. The consolidation has largely occurred between the upper 90s/lower 100s and 106 level. Prices tried to break out in mid-November but failed.

3-Month (left), 1-month (upper right) and 2-week (lower right) chart.

The 3-month chart shows that the ETF printed a double-top in early November, and then quickly fell back to the 200-day EMA. The 30-day chart (upper right) shows that the general trend during the last month has been modestly lower as does the 2-week chart (lower right).

While the economic backdrop is very strong, the charts aren't inspiring. They show that the ETF is still largely consolidating in the long-term (top two charts) while trending modestly lower in the shorter term (lower charts). There's nothing indicating that a rally is forthcoming.

If you have a position, keep it, but don't add to it. And don't take a new 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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