One book that is a staple of nearly every high school English curriculum is Charles Dickens' ' A Tale of Two Cities'. The book essentially compares and contrasts the lives of people at the top of the economic spectrum and those at the bottom. In essence, it showed that people living in close proximity can have entirely different realities due to their circumstances.
This same dynamic has been showing up in the stock market for most of 2021. For instance, the S&P 500
While odds and recent history indicate that the latter theory is likely correct, the former theory seems to be gaining steam especially as the market sell-off has broadened out from a couple of growth-oriented and more speculative sectors to 90% of the market. And, it's accelerating with Senator Joe Manchin of West Virginia's declaration that he is a No on the Build Back Better bill.
Despite these challenges, the fact remains that this is a bull market and extreme weakness is often a buying opportunity. One sector that stands out in terms of fundamental strength and technicals are industrial stocks. Here are 3 reasons that investors should consider getting long high-quality stocks in the sector:
1. Continued Earnings Momentum
Most industrial stocks posted very strong earnings in the last quarter and raised guidance. Entering Q4, the Industrials sector is poised to lead all other sectors in terms of earnings growth with major tailwinds being increased auto and aviation production. Of course, earnings are one of the main drivers of stock prices.
2. Supply Chain Challenges Easing
This ties into the next bullish catalyst although the recent jump in coronavirus cases could slow this trend. One reason for the industrial sector's output gap is that supply chain issues have prevented the economy from reaching full capacity. The most notable example is aviation and autos which are a major part of overall auto production. This is far from ideal but improving which means that auto production and aviation production returning back to full capacity will be another tailwind for the sector.
3. Charts Showing Accumulation
The only risk to strong earnings is that it could be "peak" earnings. While this should be a consideration, it doesn't seem likely as the charts are showing strong signs of accumulation and not much distribution. On selloffs, volume and volatility have been muted, while volume has been strong on up days. These are signs that the stock is being accumulated on weakness by institutions.