Industrial ETFs Bouncing Off Key Support

Despite the overshadow of trade tariffs, industrial stocks remain underpinned by a lower corporate tax rate (35% down to 21%), a push for increased infrastructure spending and a strengthening U.S. housing market. Economic data also shows increased industrial activity. Industrial production, which measures the value of output from manufacturers, mines and utilities, is up 5.1% year over year as of September 2018. The sector should additionally benefit from early investor rotation into value names, robust profit forecasts and increased buyback activity.

Senior analyst at Wolfe Research Nigel Coe told Barron's that he believes industrial stocks can maintain strong growth momentum while the Federal Reserve's policy remains loose and supportive of growth. However, he cautioned that companies in the sector need to grow into their earnings multiples – forward earnings currently sit at 16.7 times as of October 2018. Price action also suggests that industrial stocks are at key support levels. Three leading exchange-traded funds (ETFs) in the sector have all bounced at critical technical areas on their respective charts. Let's further analyze each fund.

iShares US Aerospace & Defense ETF (ITA)

Launched in 2006, the iShares U.S. Aerospace & Defense ETF seeks to track the performance of the Dow Jones U.S. Select / Aerospace & Defense Index. The fund invests in companies that manufacture, assemble and distribute airplane and defense equipment. ITA charges investors an annual management fee of 0.43% and has returned 9.3% year to date (YTD) as of October 2018. The recent pullback found support on the uptrend line the connects the early May and late June swing lows. This $200 support level on the chart also finds support from the 200-day simple moving average (SMA), making it a high-probability buying area. A stop-loss order could be placed just below the candlestick that reversed on the trendline/moving average.

Invesco DWA Industrials Momentum ETF (PRN)

The Invesco DWA Industrials Momentum ETF, also created in 2006, aims to provide similar returns to the DWA Industrials Technical Leaders Index. The ETF's portfolio holds U.S. industrial firms that are showing strong relative strength and price momentum. As of October 2018, the fund has a -4.69% YTD return and charges a 0.6% management fee. PRN's chart appears to be forming a double bottom – the most recent swing low found support near the early May swing low at the $57 level. Short-term momentum looks to be moving back to the upside, with the relative strength index (RSI) crossing back above 30. Stops should be placed slightly below double bottom pattern to protect trading capital.

Fidelity MSCI Industrials ETF (FIDU)

Formed in 2013, the Fidelity MSCI Industrials ETF attempts to replicate the performance of the MSCI USA IMI Industrials Index. It holds companies that cover the broad U.S. industrials sector. The fund has a low expense ratio of just 0.08%, well below the 0.5% category average. Performance wise, FIDU has returned -1.33% YTD. Although FIDU's share price is trading below the 200-day SMA, it found strong support from the uptrend line that commenced in early May. The recent bounce at the $37.5 support level has moved the RSI out of oversold territory and occurred on above-average volume. Traders who take a long position should protect it with a stop below the most recent swing low.