Hold XLI As It Continues To Consolidate Gains

Hale Stewart profile picture
Hale Stewart
10.57K Followers

Summary

  • The economic backdrop is positive.
  • XLI is improving relative to the SPY.
  • The ETF is consolidating on its charts.

Cars on production line in factory

alvarez/E+ via Getty Images

Investment thesis: the economic backdrop is positive and the ETF continues to consolidate gains from the powerful post lock-down rally. For now, hold your position.

ETFs now form the backbone of most portfolios. For example, a standard portfolio is composed of some ratio of SPY (for the S&P 500) and TLT (for the long-end of the treasury market). In addition, due to low cost and high liquidity, an increasing number of investors and managers are now favoring ETFs that track broad averages over large mutual funds. Hence, an analysis of a large index-tracking ETF such as the DIA is warranted on Seeking Alpha as this is now a standard investment tool used by many investors.

State Street Global Investors has a group of 11 ETFs that combined represent the entire US economy. Their symbols begin with the two letters XL. Each ETF is one of the largest in its respective sector.

The Industrial Select Sector SPDR ETF (NYSEARCA:XLI) is -- by far -- the largest industrial ETF by assets under management.

Here is the ETF's industry allocation:

XLI fund industry allocation

XLI's industry allocation (SSGA)

And here are the ETF's 10 largest holdings:

XLI ETF top 10 holdings

XLI's 10 largest holdings (SSGA)

Let's first look at the macroeconomic backdrop for this ETF, starting with the latest ISM® PMI® data (author has permission to use the latest months' report):

The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labor resources and supplier delivery performance. Still, there were shortages of critical intermediate materials, difficulties in transporting products and lack of direct labor on factory floors due to the COVID-19 omicron variant. Quits rate and early retirements hinder reliable consumption. Panel sentiment remains strongly optimistic, with seven positive growth comments for every cautious comment, up from December’s ratio of 6-to-1.

While still positive, the latest report from Markit Economics is a bit more muted:

January PMI data from IHS Markit indicated a relatively subdued improvement in operating conditions across the US manufacturing sector. The headline figure dropped to the lowest since October 2020, as output growth was muted. Demand conditions also softened further, with new orders rising at the slowest pace since September 2020. Muted client demand was reflected in only a fractional increase in employment. The softer rise in new orders allowed firms to partially work through backlogs of work, which expanded at the slowest pace for 11 months. Nonetheless, firms were at their most upbeat regarding the outlook for output since November 2020.

Meanwhile, inflationary pressures remained marked. The rate of cost inflation eased to the softest for eight months, however, as firms also moderated the pace at which selling prices increased

Other US specific data is positive:

New orders for durable goods

New orders for durable goods (FRED)

New orders for durable goods are still rising, indicating strong industrial demand.

New capital orders excluding aircraft

New capital orders excluding aircraft (FRED)

New orders for capital goods excluding aircraft are rising at a brisk rate.

Now that we've established that the macroeconomic environment is positive, let's take a look at how the XLI has performed relative to a group of 11 peers, which, combined, represent the entire US economy. These are the XLB, XLC, XLE, XLF, XLK, XLP, XLY, XLV, XLY, and VNQ. (11 total):

Week Month 3-Months 6-Months 1-Year
XLI's relative performance 4th 6th 9th 10th 8th

Data from Finviz.com

The ETF's performance has risen in the more recent time periods.

RRG chart of the XLI relative to the S&P 500

RRG chart of the XLI relative to the S&P 500 (StockCharts)

An RRG chart compares the performance of one security to another. Here we're comparing the XLI to the S&P 500. The ETF's performance is "improving."

XLI weekly and daily chart

XLI weekly and daily chart (FRED)

The weekly chart (left) shows that the ETF is consolidating gains from the post-lockdown rally. The daily chart (right) shows there's support in the ~98 range.

The XLI is a hold. The economic backdrop is positive and the ETF is consolidating gains. However, set a sell-stop in the 97.5 area since a break below that level would likely signal a further decline.

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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