The First of Four Sectors Primed to Pull the S&P 500 Lower
There are a few hot sectors in the market.
Whether it’s the safe havens or the risk-on sectors, a few always stand out above the crowd…
Right now there are 11 major sectors that can be found in the S&P 500 – here they are listed by weight:
But when you boil it down, 25% of the index is bullish right now – yea, just information technology, it’s the only thing that’s moving higher at the moment.
Then 31% of the S&P 500 is neutral, still trading in those ranges that are soon to be broken.
And then the big one – 43% of the S&P 500 is already trending down in a bearish pattern…
We’ve been trading in this sideways 4% trading range for so long and this is the exact reason why.
If I would have shown you this chart just one month ago, it would have shown a much more even distribution between the bulls and the bears – That is what causes sideways movement within the index.
Now, if you were trading in those ranges, you still could have made money. There’s no doubt about that – just ask Kenny, he’s going to make money on those small moves every time.
Or maybe you were with me and made a good bit of money when the market transitioned from one range to another but – and I may just get scolded for saying this – those trading ranges weren’t transitory.
We are now in a situation where we just need one thing as a catalyst to start to tilt the scales in one direction and these ranges are going to be blown to pieces.
And I don’t have just one, there are four.
Four sectors are primed to make this market tip and break away from this range-bound trading.
Today, we are going to talk about the first sector on my hitlist – industrials…
There are a few stocks that have some added pressure on them and when they fall, we are going to see another 7% of the S&P 500 move into bearish territory.
For starters, we need to look at the wide view of the industrial sector, for this we are going to use the Industrial Select Sector SPDR Fund (XLI):
XLI is quickly slipping below its 20-month moving average, which is an indication of a bear trend for the sector.
Now, if you take a close look at this chart, you’ll notice this has happened six times since 2008, and each of those times the ETF gets demolished by the selling pressure that ensues.
This ETF is made up of companies like Delta Air Lines Inc (DAL), United Parcel Service Inc (UPS), and Northrop Grumman Corp (NOC).
I think you get the idea they are companies that are industrial in nature.
There’s one company that is painting a clear picture of what is happening to these companies, and that’s Fastenal Co (FAST):
I actually gave this as a side trade in one of my services recently, this company does just about everything from producing nuts and bolts to actually distributing products – it’s a true industrial company.
But, there has been a lot of chop in this company stock over the last six months, and it gets into these situations where they keep testing the recent lows.
Right now even, it’s trying to break through the $50 level which has a ton of put open interest.
On top of that the $50 price is exactly where the 200-day moving average is sitting. Once we see a break below that it’ll act like a slingshot on this stock accelerating its downward movement.
This is your one representative for the industrial sector…
If you want to know how I would trade it, take a look at this side trade:
Buy-to-open the FAST May 19, 2023 $50 puts
Right now you can get into this trade for a premium in the range of $1.50. We are going to look out to the May expiration so there is some room for this trend to play out – it’ll be a bit of a slow burn.
And of course, there are several other companies that make up this 7% of the S&P 500 and all of them are turning into a carbon copy of exactly what we are seeing in this FAST trade.
If you want to dive head-first into the industrial sector take a look at these names:
- Deere & Co (DE): look for a break below $370 and this should trade to a target of $320. All of the analysts have this company as a strong buy, as this starts to tip, it’s going to be like letting the floodgates open as everybody rushes to get out
- CSX Corp (CSX): the railroads have been getting beat up by the media – and yes, it’s mostly been Norfolk Southern but this company is going to follow suit just as we are seeing with the banks.
A slowdown in anything being moved across the country is also going to start putting pressure on this company – remember the Dow Theory still works, and with talks of the recession still on the table we could see this get pretty ugly before it gets better.
- Delta Air Lines Inc (DAL): I hate to say that this company is in any trouble as it’s my go-to airline when I need to take a trip but, The fallout with the airlines is going to start to take everybody down.
Make sure you check your inbox tomorrow as I’m going to be sending you a breakdown similar to this on the second sector that is on its way down to help tip the market – Consumer Discretionary…
And of course, you can always join me in the room first thing in the morning for the Long and Short of it at 9:45 AM EST to ask any questions and get your real-time market updates!
I’ll see you there.
March 16 2023