« Previous—Next »

Capital Goods/Industrial Sector Perking Up

Author: James Brumley (info)
Website: http://bluegrassportfolio.com
Posted: November 13th, 2006 at 3:32 pm EST
Post your thoughts about this article. Click here!

Although they tend to be obscured by the harder-hitting technology names and the occasional energy stock, the capital goods companies (also called ‘industrials’ in some circles) may have something extra to offer right now. After a terrible summer, this sector has been particularly impressive….not in terms of the size of gains (it’s actually lagged), but in terms of how consistently healthy the upward move has been. Although we still see a brief market correction in the works - which will affect the industrial sector - the bigger bullish trend we see would make any dip a decent entry opportunity.

The chart here is actually a monthly chart of the SIC (Standard Industrial Classification) ‘Manufacturing’ stocks, as defined by the Department of Labor. Why did we resort to that convoluted index? Because surprisingly, there are very few pure ‘manufacturing’ indices to chart….at least none of any real relevance. And we really can’t use the misleading ‘Dow Jones Industrial Average’ , since it’s largely comprised of service and financial stocks. The DOL’s system is the most accurate and meaningful means we have to create a chart representative of factory-based businesses.

In any case, these stocks are collectively looking better and better. As you can tell, we have a renewed bullish shape to the chart thanks to an impressive four month run. As you can further tell, once these rallies are set into motion, they tend to stay in motion for several months, making very nice gains the whole time.

Specifically, we like last month’s big volume increase behind the 3.7% gain. That rally was enough to push this group back above the 200 day moving average line (green) after a rather dramatic tumble just a few weeks before that. This month, we’ve seen good follow-through. That moving average crossover is what we’re keying in on here…they’ve been accurate bullish signals in the past more often than not. The ideal confirmation would come in the form of the 100 day moving average line (black) crossing above the 200 day line as well. However, being a monthly chart, waiting for that crossover could be too much of a test of patience.

To reiterate, this is a monthly chart and read, so treat it accordingly. What could be a good-sized dip for short-term traders may be nothing but a blip on this particular chart.

As for instruments that generally reflect this chart, there are three exchange-traded funds to compare it to…the Industrial Select SPDR (XLI), the Vanguard Industrials (VIS), and the iShares Dow Jones U.S. Industrial (IYJ). The Dow Jones U.S. Industrial Index (DJUSIN) - which is different than the ‘Dow’ commonly used as broad market indicator - may also be a close approximation to the SIC manufacturing chart.

Some of the major individual company names in this group are General Electric (GE), Boeing (BA), Illinois Tool Works (ITW), and Caterpillar (CAT).

The stop on this bullish bias would be a close under the 100 day moving average line, which could vary slightly depending on which index or ETF you choose to monitor. There is no active target.

Manufacturing/Capital Goods Stocks - Monthly Chart
 

Post your thoughts about this article. Click here!

Comments are closed.

StockWeblog.com Weekly Update Newsletter Sign up now for weekly updates every Tuesday morning with links to our best articles from the previous week. Click Here to Register!