Industrials Sector Trading Strategy (Backtest And Example)

Last Updated on August 12, 2022 by Oddmund Groette

As the name implies, this sector covers different industries that make use of heavy equipment and involves high-level engineering.

In this article, we discuss what kind of stocks that are within the industrials sector and how you can trade them. Unfortunately, in the industrials sector it is a lot harder to find profitable trading strategies than the broader indices like S&P 500 or Nasdaq 100.

What is the S&P Industrials sector?

The Industrials sector covers a wide range of industries, up to 14, from airlines and railroad companies to military weapons manufacturers. It is made up of companies involved in construction, waste management, industrial machinery, defense, aerospace, manufactured housing, metal fabrication, lumber production, and cement production.

Two of the largest industries are Aerospace & Defense and Construction & Engineering. Still, it also includes companies that produce and distribute equipment, machinery, and supplies that are needed to manufacture other goods rather than selling directly to consumers.

We can safely say this sector involves the “old economy”.

The S&P industrials sector is made of components included in the S&P 500 index that are within the industrial sectors. The two largest ETFs tracking the sector are the Industrial Select Sector SPDR Fund (XLI) and the Vanguard Industrials ETF (VIS).

What are the 5 biggest stocks in the sector?

The top 5 stocks in this sector include:

  • United Parcel Service, Inc. (UPS). The company engages in logistics, package delivery, transportation, and other related services. Its operation is divided into two segments: U.S. Domestic Package, and International Package. The International Package segment provides guaranteed day and time-definite international shipping services in Europe, Asia Pacific, and the rest of the world. The total market cap of UPS as of July 21, 2022, is $162.354B.

  • Raytheon Technologies Corporation (RTX). The company operates in the aerospace and defense industries. It provides services to governments, commercial, and military customers worldwide. Its Aerospace Systems segment offers aerospace and defense products, and aftermarket service solutions for aircraft manufacturers and airlines, while the Missiles & Defense segment provides defense products and solutions to the US government. The company’s stock has a market cap of $139.531B as of July 21, 2022.

  • Union Pacific Corporation (UNP). The company, through its subsidiaries, offers transportation services in the US. It engages in the transportation of grain and grain products, fertilizers, food and refrigerated products, and renewables to grain processors. As of December 2021, the company has a rail network of over 32000 route miles connecting major routes across the Pacific coast and the Gulf coast. As of July 21, 2022, the company’s stock has a market cap of $136.219B.

  • Honeywell International Inc. (HON). This is a diversified company with operations across different industries. It offers technological and manufacturing services, including an aerospace business that manufactures propulsion engines, auxiliary power units, integrated avionics, communications, navigation hardware, flight safety, aircraft wheels and brakes, aircraft lighting, radar and surveillance systems, and so on. It also provides maintenance services. As of July 21, 2022, HON has a market cap of $117.63B.

  • Lockheed Martin Corporation (LMT). This is a security and aerospace company that develop, design, and manufacture technological systems, products, and services for industries around the world. It has four business divisions: Missiles and Fire Control, Aeronautics, Space, Rotary and Mission Systems, and Aeronautics. As of July 21, 2022, LMT’s market cap is at $103.883B.

However, obviously the biggest stocks in the sector vary. By the time you read this article it might have changed.

Industrials sector trading strategy backtest (XLI trading strategy)

Let’s backtest a strategy based on the ETF with the ticker code XLI. This is a highly liquid ETF with an average volume of more than 10 million shares exchanged every day. Thus, you can easily trade big size if you want.

XLI moves differently compared to S&P 500. The reason is that many of the technology stocks are the top constituents in S&P 500, while the XLI has many “boring” stocks. But in trading, boring might be good?

Another important issue with XLI is that the ETF is less mean revertive than S&P 500. A trading strategy that works on S&P 500 will not necessarily work well in XLI. If you do RSI indicator strategies, for example, you quickly realize the indicator is much less effective in XLI than SPY.

Nevertheless, below is an equity curve where we have two variables: one indicator and one intermarket asset class.

Industrials trading strategy and backtest (XLI trading strategy)
Industrials trading strategy and backtest (XLI trading strategy)

Our opinion is that the trading strategy is a little too weak to be useful. We have not managed to find any industrials strategies that complement the other trading strategies we have in other assets or ETFs. Correlation is perhaps the most important issue in short-term trading. We have covered this in multiple other articles:

Relevant trading strategy for the industrials sector

The Dow Jones Index is very much an industrial index. We have in other articles written about the Dogs of the Dow – one of the most famous trading strategies of all times.

Industrials sector trading strategy – ending remarks

You don’t need to find a sector trading strategy in every asset class or sector. We have yet to find any useful strategies in XLI and thus we simply ignore it. In trading, sometimes the best thing is to step aside and don’t trade assets or strategies that are not beneficial for your overall portfolio of trading strategies.

 

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