The Importance Of Industrials

Steve Strazza
June 19, 2020

From the desk of Steve Strazza @Sstrazza

We talk a lot about the importance of secular leaders. More often than not these groups have a relationship to Technology, regardless of whether they are classified as a Technology stock or not. Tech is everywhere today.

The last time a sector was so pervasive would have to be Industrials way back in the mid-1900's. One could argue Financials had their time in the sun too, but that was short-lived and we all remember how it ended.

Industrials may not be as important as they once were, but they are still important.

We can talk all day about the implications of America shifting to a services-based economy and how this could and should change historical correlations and relationships. I love that stuff - but at this point in my career, I know it would be an exercise in futility. It is what it is. Indexes like the Nasdaq 100 and Semiconductors simply deserve more weighting nowadays in place of the leaders of the past.

We can theorize about the consequences of this and try to predict the future, but wouldn't we just be better off dealing with the data that is already in front of us?

When we take that data back to the start, Industrials on a relative basis have the strongest correlation to the broader market than any sector throughout history. Long story short, Industrials outperforming is something we should look for and expect during periods of rising stock prices.

That brings us to our Mystery Chart this week which was Industrials vs the S&P 500, looking back about 20-years.

Click chart to enlarge view.

Thanks to everyone as always for participating. Responses were mixed as many were waiting while others were either buying or selling against the support at 0.224.

In our Mystery Chart post, we discussed how there are both bullish and bearish characteristics at play here which could support a valid argument in either direction. This chart is truly a hot mess as it has gone nowhere for two decades. It just resolved lower from a massive top. This kind of pattern would typically result in strong downside follow-through, but instead, price whipsawed higher and trapped bears beneath key prior lows.

For now, we will have to wait and see if price can hold these former lows. If it does, we'd consider this a very bullish development considering the strong long-term correlation between this ratio and the overall market. Industrials outperforming the S&P would also ease our concerns regarding the severe structural underperformance from cyclical sectors.

On the other hand, if price breaks below this key level, we're likely in an environment where there is a lack of participation from lagging sectors such as Industrials and other more offensive areas. This wouldn't be such a positive for bulls as they need to see continued rotation and improvement in breadth in order to sustain the current rally.

We recently retired our bull market checklist, which you can read about here. If we were to make a new set of charts at key levels that we're currently watching, Industrials vs S&P 500 over 0.224 would be at the top of the list.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team

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