After a bloody start last week, investors were far more cheerful to come back this time around as equity indexes broadly rose yesterday, posting the third day of gains following one of the wildest weeks on Wall Street. Stocks opened higher on Monday morning as investor optimism got a bit of a (much needed) boost after internet giant Google announced its acquisition of Motorola Mobility. Additional M&A activity on Monday further helped investors regain some confidence in the markets as Time Warner announced its purchase of cable operator Insight Communications, and drilling-giant Transocean Ltd. acquired Aker Drilling. Gold rose to $1,768 an ounce during yesterday’s trading session, though the precious metal remains below its recent all-time-high of $1,817 an ounce. Crude oil went along for the ride as well, with futures prices climbing to $88 a barrel.
Despite the last three sessions on Wall Street, equity markets are still quite fragile and investors should be cautious of “bargain shopping”, despite the attractively-low levels that many securities are trading at currently. Positive economic data is much needed right now given the sheer uncertainty and fear still plaguing financial markets across the globe [see Short-Term Bond ETFs: The Best Place To Stash Cash?]. Domestic industrial production data is slated to come out Tuesday morning and investors will surely keep a close watch on this report for any signs indicating the progress of the recovery. XLI, which tracks the Industrial Select Sector Index, will come into focus Tuesday as relevant data is released. Analysts are widely expecting industrial production to increase by 0.9%, versus last months reading of 0.2%.
From a historical perspective, the domestic industrial sector as tracked by XLI has rebounded quite strongly following the 2008 market lows. Since recently topping out at $38.98 a share on 5/2/2011, XLI has shed upwards of 15% and the fund currently appears to be holding support above $30 a share [see XLI Charts].
Long-term investors will find this ETF very appealing at current levels given its tremendous potential for upside, assuming the market settles in the coming days and XLI resumes its ongoing uptrend.
Better than expected industrial production data will likely send this ETF higher tomorrow, although traders should be quick to take any profits since the fund is still below its 200-day moving average, meaning it’s technically considered to be in a downtrend. In terms of downside, worse than anticipated production data can easily send this fund back down to $30 a share, or even lower if a broad-based market sell-off develops [see XLI Technicals].
Investors who are interested in making some “big moves” given the sea of opportunity following last weeks craziness should perhaps consider holding off a bit before going all-in [consider ETF Insider: Beware Of A Dead Cat Bounce]. It’s smarter to buy in increments, that way if the price declines further you can buy more and decrease your average price.
Consider exiting any long positions in XLI if shares decline below the $30 level. Conservative investors should hold off ideally until the fund is back above its 200-day moving average, however, those who are comfortable with actively monitoring their position may wish to enter at current levels given the potential for very sizable gains. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.