A Turning Point Is Approaching for This Sector

September 13, 2021  |  Michael Reilly

Mike Reilly Director of RiskManagement, Rowe Wealth ManagementAn important inflection point in the sector most correlated to the S&P is close – and which way it resolves will be a tell for S&P in the coming weeks and months.

You hear about the S&P 500, the Dow, and even the tech-heavy NASDAQ every day… so what?

Savvy investors – the ones looking for a real edge on the competition – have to understand what happens under the surface, where the sharks swim.

And that’s what we’re diving into today…

This week we’re starting with the transportation sector.

Why? It’s about understanding economic strength.

You don’t need a degree in economics to weed through reams of fundamental data to determine the strength of the economy…

Do yourself a favor, save the time. Here’s a quick and easy method right at every investor’s fingertips…

Just watch the movement of goods.

In a strong, robust economy when growth stocks thrive, the transportation of goods should continue to rise as the economy grows and people buy more goods.

In a slowing or weak economy, the delivery of goods will slow or stall out.

So what’s happening right now? Let’s look at the charts.



While the companies that produce the goods (members of the Dow Jones Industrials) continue to go out at record highs, the Dow Transports (the companies that deliver the goods) are breaking down.

That’s important information… and for all you DOW purists out there, it’s one of the basic tenants not to be overlooked.

The Dow Jones Transportation Average is made up of 20 companies. These 20 large-cap companies are all part of the broader Industrial sector.

And that’s the BIGGER story here today…

The thing about the Industrial sector that’s important for investors like you to know is that it’s the sector most closely correlated to the S&P 500 index.

That’s because the sector is the most broadly diversified sector of the U.S. market.
We’re talking about companies like USP, Boeing, John Deere, CAT, Lockheed Martin, and General Dynamics.

These are companies from Airlines, Defense, Building Products, Construction, Air Freight and Professional Services… it’s the most diverse sector of the market.

And it’s the reason Industrials are so closely correlated to the broader S&P 500 index.


Take a look at the chart below using a price chart of the XLI – an ETF that tracks the performance of the broad industrial sector (and the 20 components of the transportation average) compared to the price movement of the broader market, the S&P 500 index.

Industrials are the black line. The S&P 500 is represented by the green line. But it hardly matters – they move in lock-step with one another.

Now you know why it’s a good idea to track the movement of the industrial sector – to gauge the overall direction of the broader market..

If you understand what’s happening under the surface, with industrial stocks, you’ll have a jump on what’s happening in the broader stock market.

Pay close attention to this sector right now as they just may be the most important stocks to watch over the coming weeks and months.

Because as the chart above implies, what happens with industrials has important implications for the broader market and therefore has important implications for both risk and opportunity.

Here’s a close-up of Industrials… they’ve gone nowhere for months now.



Industrials, like other cyclical sectors, have been stuck in this range since May. The question is, how long will it last and which way will it resolve?

The market remains a range-bound mess as consolidations and sideways action has become the norm these days.

So if the S&P 500 continues to grind to new highs, we’d expect to see an upside resolution in industrials as confirmation.

But it’s just not happening… at least not yet.

Stay tuned as we share any new developments that arise… until then, invest wisely.




PS: We know it’s hard to make sense of all the headlines about the markets. It’s enough to make any investor feel anxious about their portfolios. But our clients at Rowe Wealth Management feel differently because our Relative Strength models are built to withstand volatility.

We have investment strategies to succeed in any market condition. We seek out what is working, and avoid what isn’t working. And we adapt to the market’s ever-changing nature so you don’t need to worry.

We understand investing can be stressful and difficult, so if you want to talk about how we make it easier, give us a call. We’re opening our doors to new investors who have portfolios valued over $500,000. If you’d like to schedule a free 1-hour consultation to review your portfolio, click here.

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