This sector is beating the S&P 500 and is set for even greater outperformance, charts show
The XLI Industrial ETF is up approximately18% year to date, yet it has largely gone unnoticed through the first 10 months of the year — even while outperforming the S & P 500 (+17%). There are two main reasons for this. First, it has clearly lagged the XLK Technology ETF , which leads the market with a31%gain year-to-date. Second,XLIhas made very little net progress in recent months; since its July’25 highs, it’s currently up less than 1%. Today, we’ll take a closer look atXLIand highlight how it’s nearing a potential breakout that could also lead to renewedrelative strengthin the weeks ahead. This first chart illustrates the consolidation range described above, shown here as atrading box. Trading boxes are a simple way to categorize sideways price action, and when they formwithin a longer-term uptrend, they are typically viewed asbullish continuation patterns. We last saw a similar structure — though over a shorter duration — from mid-May to late June. That digestion followed a strong breakout earlier in May and ultimately led to the next leg higher that carried into the end of July. Some investors might view the recent inability to breakout to new highs as a negative, especially while other sectors continue to rally. However, momentum tells a different story: While the 14-day RSI has cooled from its prior extremes, it hasmerely neutralized, reflecting a healthy period of consolidation. Importantly, there has beenno meaningful negative momentum divergence, supporting the view that this remains apause — rather than a trend reversal. Zooming out to themonthly chart, going all the way back to 2011, the same trading range is highlighted here in yellow at the very top right corner of the chart. It has taken shapeabovewhat could be a substantialmulti-year base breakout. If past behavior is any guide, this could be a meaningful start to a much bigger move. Over the years, XLI has recordedfour other major breakoutsto new all-time highs, and each one has led tomonths — and sometimes years — of additional upside follow-through. This supports abullish scenarioonce again forXLI, with the current consolidation potentially serving as the next launching pad for trend continuation. The next question is whether investors should rotate intoXLI, given that it has recently trailed technology, as discussed above. While the performance gap is notable, it is actually avery recentdevelopment. Remember, XLI has beendirectionlessfor a few months, but as recently asmid-September,XLI and XLK were nearly identicalin year-to-date performance. It’s only over the last several weeks that technology has begun to materially outperform again. With many of the most influentialmegacap technology and growth companiesreporting earnings over the next two days — and several already extended after multi-day winning streaks — there is a risk that themomentum in that trade could start to fade. Should that occur, capital may begin to rotateback into sectors that are just now attempting to break out of substantial bases — such asXLI. This final chart highlights theXLI vs. XLK relative performance ratio. As is clear, this ratio has been in asteady downtrend for the past five years, meaningtechnology has consistently outperformed industrialsover that period. However, there have been multiple points where the ratio hasreversed higher, favoring industrials — often after asignificant stretch of underperformanceby XLI. It’s been 28 weeks since the XLI/XLK last peaked in mid-April. Since then XLI has underperformed XLK by roughly 20%. Notably, this degree of underperformance over a 28-week period has happenedthree other timessince 2020, each highlighted on the chart. In those instances, the reversalsresulted soon thereafter each time: Mid-2020 through mid-2021 Most of 2022 into early 2023 And a shorter bounce inspring 2023before XLK regained leadership Given howdeeply depressedthis relative performance line has become again, history suggests that we may benear another mean-reversion inflection point — potentially favoringXLIsoon. — Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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