This month, the industrial sector finally blasted through a resistance zone that was impenetrable for 18 months. With the ceiling finally felled, the entire space is now basking in record highs. And that makes some industrial stocks attractive buys now.
Today we’ll highlight three of the best.
Breakouts to all-time highs like that seen in the Industrial Sector ETF (NYSEARCA:XLI) this month are bullish phenomenons for a variety of reasons. First, it signals buyers are willing to pay a richer price than ever before, highlighting their degree of conviction. Second, every single shortseller is losing money, which created a powerful urge to buy back their losing positions. Third, there isn’t an existing shareholder on the planet that is losing money. No underwater longs are waiting to get back to breakeven so they can sell.
Throw it all together, and we have a backdrop for increasing demand and decreasing supply. I’ve scoured the sector and found these three industrial stocks to buy that stand out from the crowd.
Industrial Stocks to Buy: Caterpillar (CAT)
If you agree that stock prices are the best forward-looking economic indicator there is. And, if you believe that Caterpillar (NYSE:CAT) stock reflects how investors feel about global growth. Then, the mega breakout in CAT stock last month has to have you beating your bullish drums.
The 18-month downtrend for Caterpillar finally ended, and the weekly chart is back into an uptrend for the first time since 2017. This week’s market pause has allowed CAT to digest recent gains and begin a pullback pattern that is creating a lower-risk entry. While further weakness would be welcome, it’s at a point where dipping your toe in the water could make sense.
With implied volatility scraping the bottom of its one-year range, I like buying call spreads. You can purchase the Jan $145/$150 bull call for $2.30 and offers $2.70 of reward if CAT rises above $150 by expiration.
UPS (NYSE:UPS) tagged a 52-week high last week and has since formed a textbook bull retracement pattern. Volume patterns show many accumulation days over the past month and zero signs of distribution. Tack on the upcoming holiday shopping season and a broad market that continues to court record highs, and I see little reason why UPS stock won’t keep trucking higher.
Like Caterpillar, UPS options carry low implied volatility making long premium plays a cheaper bet than usual. Long calls aren’t a bad way to go, but I prefer bull calls for additional leverage and higher probability. If you think UPS can run toward $130 by mid-January, then buy the Jan $125/$130 bull call spread for $1.50.
The risk is limited to the initial $1.50 cost, and the reward is $3.50.
The final pick of today’s trio is Cummins (NYSE:CMI), which is also forming an interesting pullback pattern. Last month’s rally carried CMI stock past weekly resistance and places it within striking distance of last year’s record print of $194.18. Its price behavior has mirrored that of CAT, with a price rising above 20-day, 50-day and 200-day moving averages.
This week’s retreat is bringing CMI closer to the 20-day average, which has been a gathering ground for dip buyers in the past. It could drop for another day or two, so wait for a break above a prior day’s high before pulling the trigger.
Implied volatility is running hotter for CMI than the previous two trade ideas, so I’m switching it up with a bull put idea. Sell the Dec $170/$165 bull put for around 75 cents. You will pocket the reward of 75 cents if the stock sits above $170 at expiration.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!