Industrials have been crushed this week.
The XLI industrials ETF plummeted more than 2% on Tuesday, its worst one-day drop since August, after ISM manufacturing activity contracted to its lowest level in more than a decade.
The group is down but not out, Oppenheimer head of technical analysis Ari Wald told CNBC’s “Trading Nation” on Tuesday.
“What’s most telling in our work is the resiliency of this group against such weak manufacturing data,” Wald said. The equal-weighted XLI ETF relative to S&P 500 is “testing its trend of lower highs dating back to January of 2018, but making higher lows nonetheless. I think you are set to see that trend push out to the upside. We are bullish on industrials.”
However, Wald sees some corners of the industrials sector as more favorable than others.
“Given weak seasonals in October for the market overall, maybe you want to be selective,” said Wald. “Looking underneath the surface, aerospace and defense flags favorably in our work. I think you’re looking to buy those names on this market pullback and steer clear of the transports.”
The aerospace and defense industry group is up 6% in the past three months, while transportation has fallen 5%.
Quint Tatro, founder of Joule Financial, is steering clear of the space as a whole until the trade overhang recedes.
“People have to be very careful,” Tatro said during the same segment. “As we roll into October, there’s really no incentive for the Chinese to make a deal, and this particular space is going to be hit the hardest as uncertainty prevails.”
The industrials sector has managed to perform in line with the S&P 500 this year even as the uncertainty of trade policy with China keeps investors wary. The XLI ETF is up 17% in 2019, though down 2% in the past three months.
“Companies are just cutting back on any capex whatsoever. We’re now starting to see that in the manufacturing, ultimately in the ISM data,” Tatro said. “So until we see real resolution with China trade, the industrial space is going to come under pressure and it’s a no-touch for us.”
