Industrial's building a base for upward momentum

Key Points

• The Industrial Select Sector SPDR Fund (NYSE: XLI) has surged over 16% in the last three months.
• The sector ETF is consolidating near its 52-week high and showing potential for further growth and upward momentum.
• XLI's top holdings include Caterpillar (NYSE: CAT), Union Pacific (NYSE: UNP), and Boeing (NYSE: BA), with each stock's performance and outlook influencing the sector's direction.

The overall market continues to trade at all-time highs, with the SPDR S&P 500 ETF Trust NYSE: SPY already up an impressive 2.5% year-to-date and over 16% during the previous three months. The move higher this year has again been helped by a surging tech sector, with many leading global magnificent seven members hitting new all-time highs.

However, one sector that has also played a helping hand in the recent strength is one less spoken about in recent times. The industrials sector has been quietly consolidating near its 52-week high and trading at the high of its 50-day range. Over the previous three months, the Industrial Select Sector SPDR Fund NYSE: XLI has surged over 16% impressively. 

Its performance over the previous three months and the current setup in the sector warrants a closer look at the ETF and its top holdings.

The industrial sector approaches an all-time high

The Industrial Select Sector SPDR Fund aims to match The Industrial Select Sector Index, representing industries like aerospace and defense, industrial conglomerates, machinery, and others. Managed by SSgA Funds Management, Inc., the fund has a 1.45% dividend yield and $15.75 billion assets under management, with 91.5% geographic exposure to the United States and 81.8% sector exposure to industrials.

Following its impressive three-month performance, the ETF is trading near its all-time high. From a technical analysis perspective, a bullish setup has emerged as the stock consolidates well above several key moving averages, just a stone's throw away from all-time highs. 

However, whether or not the sector will break out depends on the chart and many other factors that might influence the sector. One of those factors includes considering the ETF's top holdings, which hold significant weight over the directional momentum of the overall sector. 

XLI’s top 3 holdings

Caterpillar NYSE: CAT is the ETF’s top holding with a 4.57% weighting and $152 billion market capitalization. The stock has an attractive P/E of 17 and a dividend yield of 1.73%. Over the previous three months, its surge has helped the overall sector perform, with its stock up over 24%, outpacing the broader sector. CAT shares continue to outpace the sector, with the stock recently hitting a new 52-week high after breaking above its all-important $300 level. Investors will closely monitor its upcoming earnings report, scheduled to be released on February 5.

Union Pacific NYSE: UNP just misses the top spot, with a 4.33% weighting in the sector, putting it in second place. The $145 billion company is a Top-Rated Dividend stock, offering a 2.18% yield, and has a Moderate Buy rating and price target forecasting just over 1% upside. Like the overall sector, the stock is consolidating near its 52-week high, well above key moving averages such as its 200 and 50-day rising Simple Moving Averages. Its current 52-week high might act as the inflection point, with a move above it indicating the start of an additional leg higher. 

Boeing NYSE: BA is the third largest weighted name in the ETF, with a 4.13% holding. The stock, plagued by several negative catalysts and headlines in recent months, has underperformed the sector, up just over 12% in the previous three months. More worrying is that the stock has fallen over 20% year-to-date, thanks to recent challenges and developments. With the stock now trading in correction territory, below declining key moving averages, the sector breakout might be slightly impeded by further weakness in Boeing shares. Conversely, if the stock can reclaim its 200-day Simple Moving Average in the short term, it might play in favor of a sector breakout. As it's a significant holding of the ETF, investors should keep a close eye on further developments that impact the stock and, in turn, the broader sector.