Industrials Advance on Broad Breadth but Quality Stays Thin

On Friday, October 9, 68.8% of the stocks in the Industrials sector posted gains, yet only 27.1% of the graded weight in the exchange-traded fund Industrial Select Sector SPDR Fund (XLI) sits in companies graded A or B. Across the S&P 500, the sector finished +0.4% on a cap-weighted basis, running slightly ahead of the equal-weighted reading of +0.3%. Larger holdings provided the main lift for XLI, which closed +0.5% at $169.25, led by Quanta Services Inc at +3.0% and Honeywell Aerospace Inc at +2.6%, even as Deere & Company closed -4.9%. That broad advance followed a market-wide recovery, as stocks rebounded when oil price concerns settled and buyers stepped back in after technology declines earlier in the week.

The sharp drop in Deere & Company came as a bearish crop report pressured grain prices and farm economics, weighing on agricultural equipment demand. That agricultural pressure followed regulatory news earlier in the week, when federal antitrust officials opened a public inquiry into manufacturer distribution and repair restrictions in farm equipment.

In aerospace manufacturing, PPG announced a 70 million dollar investment to expand its aerospace operations in Alabama. The multi-year project is designed to increase production capacity and support operational growth in its aerospace unit.

EasyAlpha grades each company against its industry peers. Companies graded A or B have stronger fundamentals, and historically they have carried a lower risk of large drawdowns than companies graded D or E. In Industrial Select Sector SPDR Fund, however, high-quality representation remains limited. Only 27.1% of the fund's graded holdings sit in the A or B tiers, meaning roughly three-quarters of the portfolio is composed of companies with average or below-average peer grades.

Friday's move fit into a day where 9 of the 11 sectors rose, but the sector's broader progress has been subdued. Over the past month, XLI stands -0.8%, and over the past 100 sessions the fund sits +0.3%. Over the past six months, the fund sits -2.0%, even as it stands +10.4% over the past twelve months.