The industrial cyclical sector is comprised of a wide-ranging group ofstocks. This is inclusive of companies that are in the metal fabrication,small tools, farm machinery, general machinery and industrial electricequipment. You can see the basic theme here as these stocks are the old-line, boring companies that produce the basic components and machinery thatbuild infrastructure.
It's not a new theme and, in fact, it has been a strong area in recent years. While the U.S. has its own demand for such products, the real growth is coming from overseas.
Industrial Sector SPDR
The infrastructure buildout going on in developing companies, like China and India, has significantly increased demand for these products. It's a very simple theme. With the economic growth booming in these countries coupled with basically little infrastructure, the expansion potential is huge and looks to remain strong a while longer.
These companies also produce the machinery that pull the basic materials out of the ground. The raw materials that feed the infrastructure buildout are being taken out of the ground with equipment manufactured by these companies.
It doesn't get much simpler than this. To build a road, you need a bulldozer, a dump truck and a roadgrader. The more roads you build, the more equipment you need. We are going to focus on a small segment of this larger group, in the farm- and construction-machinery stocks. Industrial cyclical companies that sell overseas are also benefiting from the weak dollar. The weak dollar makes the goods these companies produce more competitive from a pricing standpoint with worldwide competitors.
Most stocks in this sector have been moving higher and remain in strong uptrends. These advances typically have pockets of consolidatingprice action along the way. These are buying opportunities, and once again, we are finding many of these issues to be in sideways consolidations.
This is simply a period when the buying has dried up but little selling takes place. Buyers are hoping for better price levels to accumulate these issues. When that occurs, buyers step up. Typically, the declines are short-lived, as buyers are anxious to purchase these issues.
Two such issues we are focusing on as a way to play the continued strength in the industrial cyclical space are
Deere is a household name, and it's a positive configuration that is positioned to move higher. The stock has spent the last five to six weeks trading sideways, but it's now on the verge of a new breakout to the upside. We would look for further strength, and a move to the $130 level is likely.
Bucyrus is a less familiar name. This company makes mining machinery, such as electric mining shovels and drills. The consolidation in this stock is very similar to that in DE, and the stock has equal upside prospects. We would look for further strength to the upper $70s in the near term.
At the time of publication, John Hughes was long Bucyrus. Hughes began his career at the NYSE in 1989 followed by twelve years running the technical analysis department and co-managing a hedge fund for a New York based brokerage firm. In 2001, John Hughes co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indexes and sectors. Mr. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion.