The market has been choppy for a while and it's been difficult to find a direction. But, given the macro picture coming to that part of the cycle where industrials are probably peaking and it's a good time to start looking at shorting some industrials.
Firstly, I would short on days like today when the market is up and Industrials are green. But I would also keep my position sizes small, as I've reiterated before and short progressively.
$XLI is a good one to short. You can see from the chart below, that the industrials display quite a lot of strength going into a recession but, once we're in that slowdown, they breakdown a lot. And that's exactly what we've been seeing. We should also remember that many of the industrials pay dividends, which is why they are favored. We also got a boost in the industrials this time around particularly because of the Inflation Reduction Act.
I would short above $100.50 (that where the 50-day moving average is, and quite possibly will act as resistance here).
I've also looked at some individual names. I've scanned these names based on:
- relative strength
- deteriorating fundamentals
- the overall macro picture.
The company produces tooling and engineering components. They did very well in 2021 but as you can see from the lower left box, the company's EPS and Sales growth has slowed down considerably over the last 3 quarters. Goldman Sachs has a sell rating on this company as well. Goldman expects further deterioration on their EPS growth for the next quarter and through the next year.
This looks like a good short below $25.80 (according to Mayhem).
Flowserve is another "sell" from Goldman Sachs. I know we don't like the big bank ratings but, I do like some of the analysts from GS, they tend to put in some work in their analysis. Goldman expects a -14% decline in their EPS this quarter. But, of course, I look at fundamentals myself and when the chart is tricky, I ask Mayhem or Horse for their opinion.
I don't have anything much to say about Flowserve. They make valves and pumps, and as you can see from the box in the corner, they have not being doing well at all. Their PE ratio right now is at 30, which is above their 5-year average and the the average for Industrials (around 18x-20x).
Just looking at the chart, you can see plenty of overhead supply. According to Mayhem, good levels to short may be
1st - $31.25
2nd - $30
3rd - $28.90
As always, please remember to put in stop losses because this market has been unpredictable. And these are swings so they may take sometime to break down so you may want to wait until we reach the levels to short.
None of the above is investment advice. I have no position in any of these names but, I may initiate a short position 3 trading days after the publication of this article.