Searching for investment opportunities in the United States offers a smorgasbord that can overwhelm even the most voracious appetite. But if you find a positive trend in a sector then it can help steer you towards targeted opportunities.
Last week, while reading my daily issue of Tech Talk (www.timingthemarket.ca/techtalk) I happened upon the chart for the Industrial Select Sector SPDR (XLI-N). The chart had a number of factors that I look for when the overall trend is going up. There is better than average volume, along with a solid uptrend line, and a golden cross has been in place since late June, 2009.
In addition, the relative strength index (RSI) has been signalling that XLI has been overbought for over a month, which indicates that investors are hungry for the sector, and that's considered a sign of strength. There is some resistance at $34 (U.S.) and XLI may have gotten a bit ahead of itself but let's not allow that to put a stop to the investigation.
The top 10 holdings in the Industrial Select Sector SPDR include Caterpillar Inc. (CAT-N) which I covered on Feb. 17. At the time I suggested that Caterpillar presented a trade at $56 with potential of reaching $65. As the chart indicates it has done better than that generating a 23-per-cent return in about 10 weeks.
The current situation with Caterpillar indicates that there is some resistance at $70 but if it can breakthrough it can run to $75 and then perhaps test $80.
United Technologies Corp. (UTX-N) is also one of the top 10 holdings in the XLI ETF and one of the companies I keep an eye on because of their long history in the fuel cell sector and the fact that every time I get on an elevator I look to see if it's an Otis. If you can think of something more interesting to do in an elevator let me know. Please, only legal activities will be considered.
United Tech's chart has a similar profile as Caterpillar. It tested support at $65 in mid-February, and caught a nice bounce to resistance at $77, generating an 18-per-cent profit. It has met resistance at $77 and may have to test support at $74 as it consolidates.
The last of the top 10 that I think is interesting is General Electric Co. (GE-N) for a number of reasons. One of the great unanswered questions at GE is: Can Jeffrey Immelt finally wring out the financial engineering that made his predecessor, Jack Welch, a household name but tied a boat anchor to the company? Next year will be the 10th anniversary of Mr. Immelt's tenure as chairman and chief executive officer and I would imagine he wants to cap it off with a flourish.
Once again the chart for GE shares many characteristics with those of Caterpillar and United Tech. A test of support in mid-February, in this case at $15, and a run to resistance at $19.50 has resulted in a 30-per-cent return on the trade.
When I look at the charts for XLI, Caterpillar, United Tech, and GE, they all seem to be taking a breather and can be expected to consolidate some of their recent gains. However, the charts all still exhibit an unbroken uptrend with golden crosses in place, and there have been multiple tests of support with the advance continuing. Technically there seems to be some gas left in the tank for the sector and the individual stocks.
The go-forward scenario from a fundamental perspective can be seen in the U.S. first quarter gross domestic product report. It seems that corporations have loosened up the purse strings with corporate capital investment up 13.4 per cent from the first quarter of 2009. When capital spending rises, driven by improved earnings, XLI, Caterpillar, United Tech, and GE all benefit.
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