In case you haven’t been paying attention, it’s the tech-like names that have led to start 2023. Communication Services, Consumer Discretionary, and, of course, Information Technology. Those sectors were the undisputed champs of the raging bull market of the 2010s, and they’re at the front of the pack again in 2023.
Just don’t let a few weeks of outperformance distract you from who the real leaders of this market are.
The Industrials are still showing relative strength.
The sector bottomed relative to the rest of the market in January 2022, then spent the first nine months of the year in an ascending triangle consolidation pattern. Things really got going in the fall, when the sector broke out of that pattern and ripped to multi-year relative highs. A few months later, and now Industrials have successfully backtested their 2021 peaks for a second time.
The strength has been broad-based. Or perhaps more accurately, the sector has been even stronger on a broad basis. If you look at the equally weighted sector (which treats every stock in the sector equally rather than putting the most emphasis on the biggest stocks, as market cap weighted indexes do) compared to the S&P 500, you’ll see that Industrials never even bothered to backtest the 2017-2021 highs. Instead, they’ve kept setting higher highs and higher lows.
Here’s another way to look at that internal strength – we can directly compare the equally weighted sector to the cap weighted one. EW Industrials are holding their multi-year relative breakout.
That’s not too surprising, though. The equal weight indexes have outperformed the cap weighted ones in nearly every sector. They’ve done so at the major index level, too. So what happens if we compare apples to apples and look at EW Industrials vs. the EW S&P 500?
We once again see a sector that’s on the verge of breaking out of a multi-year consolidation.
A failed move in December resulted in a mean reversion – but not a trend change. This attempt could be the real deal.
Here’s a deeper look at some of the underlying strength. The Construction and Engineering sub industry has spent virtually zero time below its 200-day moving average since the middle of 2020. Just by looking at this chart, you’d never know that every major US indexes entered a bear market in 2022.
The group is touching new all-time highs once again.
Trading Co’s and Distributors just busted above the neckline of a one-year consolidation range. That’s something you see outside of an uptrend.
In the Construction Machinery and Heavy Trucks sub industry, the 161.8% retracement from the 2018-2020 decline was the ceiling for the rally off the COVID lows. A failed breakout above that key level kicked off a 16 months of declines, which finally found support back at those January 2018 highs.
It’s been nothing but blue skies since then.
The next area to watch is Aerospace and Defense. It’s the biggest sub-industry by market cap, and a breakout from this group would just be one more piece of evidence pointing toward continued strength for the sector.
The Industrials are making moves. Don’t let a few good weeks from the laggards distract you from who the real leaders are.