Restrictions have weighed heavily on industrial stocks, with many factories either shutting down entirely or reducing operations to ride out uncertainty caused by the pandemic. Furthermore, disruption to many of the sector's end-market customers has compounded challenges. Nothing reflects this better than the Dow Jones Industrial Average's 5% underperformance of the broad-based S&P 500 Index so far this year.
The industrials group received a much-needed boost Tuesday after Federal Reserve governor Lael Brainard called for sustained large-scale asset purchases to help the economy recover. The sentiment was further bolstered after St. Louis Fed President James Bullard said that the unemployment rate could fall sharply in the second half, especially if companies recall furloughed staff.
Below, we take a closer look at two established industrial names as well as the sector's leading exchange-traded fund (ETF). We'll also turn to the charts to explore several swing trading opportunities.
Eaton Corporation plc (ETN)
Based in Dublin, Ireland, Eaton Corporation plc (ETN) operates as a diversified power management company, selling everything from hazardous duty electrical equipment to hydraulic power generation systems. When the $36.27 billion industrial giant reports its second quarter earnings on July 29, traders should look for improvements in its vehicle segment on the back of rebounding auto sales. This division saw sales contract 26.2% in the March quarter. Although Eaton stock has fallen 2.73% year to date, it has outpaced the specialty industrial machinery industry average over the same period by nearly 10% as of July 15, 2020. Investors also receive an enticing 3.34% dividend yield.
Eaton shares have formed a symmetrical triangle that finds support from the closely aligned 50- and 200-day simple moving averages (SMAs). Buyers pushed the price above the pattern's upper trendline in Tuesday's session, which could drive a rally up to the 52-week high at $103.88 set on Feb. 20. What's more, the moving average convergence divergence (MACD) indicator sits poised to cross above its trigger line and generate a buy signal. Traders who enter at these levels should consider placing a stop-loss order underneath the 50-day SMA.
Rockwell Automation, Inc. (ROK)
Rockwell Automation, Inc. (ROK) provides industrial automation and digital transformation solutions through two segments: Architecture & Software, and Control Products & Solutions. Some of its product offerings include programmable automation controllers, motion control devices, and AC/DC variable frequency drives. BofA Securities analyst Andrew Obin upgraded Rockwell Automation stock in May, saying that he sees a rebuilding of U.S. manufacturing driven by a disruption in supply chains and rising geopolitical tensions. As of July 15, 2020, Rockwell Automation stock offers a 1.93% dividend yield and has returned 9% on the year. Gains have accelerated in the past three months, with the shares adding 34.37%.
Since reaching its 2020 peak in early June, the price has consolidated within a descending triangle. The pattern encounters dual support from a crucial eight-month horizontal trendline and the 50-day SMA. Tuesday's breakout above the triangle provides an entry opportunity for traders who anticipate further upside. Those who take a position should think about booking profits using a trailing stop to exploit as much of the trending move as possible. To implement this technique, one could exit on the first close below the 20-day SMA (green line).
Industrial Select Sector SPDR Fund (XLI)
Launched over 20 years ago, the Industrial Select Sector SPDR Fund (XLI) aims to provide a similar return to the Industrial Select Sector Index – a benchmark comprising large-cap industrial-sector stocks from the S&P 500 Index. Bellwether industrial names, such as Union Pacific Corporation (UNP), Honeywell International Inc. (HON), and The Boeing Company (BA) feature prominently in the fund's basket of 72 holdings. More than 13 million shares exchange hands most days on tight penny spreads to ensure ample liquidity for active traders. As of July 15, 2020, XLI has net assets of $9.1 billion, issues a 2.21% dividend yield, and is down roughly 15% on the year. The ETF carries a low 0.13% management fee.
XLI is trading below its 200-day SMA but remains above $66, where the April swing high has flipped from resistance to support. Those who buy here should look for an initial move to the June 8 high at $76.19, followed by a possible test of the early 2020 double top around $84. Manage downside risk by placing a stop beneath last month's low at $65.63 and amending it to the breakeven point if the fund's price closes above overhead resistance at $71.50.