With the S&P 500 breaking to record highs, many sectors are departing trading ranges and racing to the sky. Today we’re zeroing in on the industrials sector and highlighting three stock breakouts to buy.
I have a few reasons for focusing on the Industrials Sector SPDR Fund (NYSEARCA:XLI). Its weekly chart is a whisker away from breaking out of a two-year base. Friday’s strength was impressive, particularly with the groundswell in volume. With almost 20 million shares traded, XLI notched its most active trading session since August.
The accumulation suggests buyers were swarming in a big way. It’s the type of volume surge traders want to confirm a breakout attempt. I’ve scoured the sector and found three holdings that are leading it higher. They’re all top stocks to buy into year end if you think the fresh strength has staying power.
Caterpillar (CAT)
For almost two years Caterpillar (NYSE:CAT) has been trending lower. The trade war and intermittent fears of an economic slowdown declawed CAT, resulting in a peak-to-trough 55% crash. Along the way, a descending trendline emerged that defined the downtrend and halted every recovery attempt.
Last week that trendline broke, signaling more strength than we’ve seen since the bear market began. If that’s not a change in character, then I don’t know what is. Volume patterns surrounding the breakout have been extremely bullish, with seven accumulation days seen over the past three weeks.
With institutions once again embracing CAT stock, it’s worth a bullish trade. Buy the January $145/$150 bull call spread for around $2.50. You will double your money if CAT sits above $150 at expiration.
Ingersoll-Rand (IR)
While Caterpillar has been tangling with bears, Ingersoll-Rand (NYSE:IR) has been trekking higher. This morning’s gap is pushing the industrial giant to a new record at $131. It’s also creating a breakout over a six-month base. Last week’s earnings announcement sparked a buying binge, bringing IR stock to the cusp of the breakout. Friday’s and today’s bull run was all that was needed to push it over the edge.
While the shares are slightly extended in the short run, any weakness over the coming days should ultimately become a buying opportunity.
With the uncertainty of earnings now in the rearview mirror, implied volatility has fallen to 20%, or only the 11th percentile of its one-year range. That means options are cheap, and thus long call strategies more appealing.
Buy the January $130 call while selling the January $135 call for a net debit of $2.15. Consider it a bet that IR rises past $135 by January expiration. The risk is $2.15, and the potential reward is $2.82.
United Technologies (UTX)
United Technologies (NYSE:UTX) rounds out today’s trio with its breakout to all-time highs. Of all three picks, UTX stock looks the most like the overall sector ETF, XLI. The past two years have seen a sloppy base form, which is now culminating in an upside breakout.
I’ll invoke a popular charting phrase that’s relevant here: The longer the base, the higher in space. Once a stock finally departs a trading range that had previously kept a lid on rallies, it’s extremely bullish. Completed bases often become launchpads to rocket-like runs.
Whether the gains come fast or slow remains to be seen. In either case, UTX stock is worth a bullish shot. Like IR, its options are dirt cheap, suggesting call spreads are the way to buy.
Buy the January $150/$155 bull call spreads for $1.80. The risk is $1.80, and the reward is $3.20.
As of this writing, Tyler Craig held neutral options positions in CAT. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
