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Weakening Industrial Sector ETF Could Foreshadow Tough Times Ahead

This article was originally published on ETFTrends.com.

The widening underperformance between the industrials sector and related industrial ETFs to the rest of the S&P 500 could signal further market troubles ahead.

The Industrial Select Sector SPDR (XLI) , the largest ETF tracking industrial stocks, declined 5.0% over the past month while the S&P 500 gained 0.8%. Year-to-date, XLI fell 3.6%, compared to the 3.1% rise in the S&P 500.

Matt Maley, an equity strategist at Miller and Tabak & Co., pointed out that XLI historically has been “ridiculously, highly correlated” to the moves of the broader market, reports Olivia Schaber for Bloomberg.

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The fund has acted as a broad economic gauge. XLI's top 10 largest holdings include many market leaders, such as Boeing Co. 8.3%, Caterpillar Inc. 3.8% and General Motors Co. 5.0%. The industrial ETF includes a large 27.9% tilt toward the aerospace and defense sub-sector, along with 16.4% industrial conglomerates, 15.% machinery, 10.5% road and rail, 7.4% air freight and logistics, 5.25 electrical equipment, 4.8% airlines, 3.1% commercial services and supplies, and 3.1% professional services.

“If history is any guide, and the XLI breaks below its May lows anytime soon, it won’t be long before the S&P follows,” Maley warned. “Everyone talks about what’s going on in the tech stocks, but we’ve also seen if you look at the industrial names, they’ve played a bigger role in the leadership in the market that most people realize.”

Traders could also hedge against further risk in the industrials sector through bearish ETF plays like the ProShares UltraShort Industrials (SIJ) , which tracks the inverse 2x or -200% daily performance of the Dow Jones U.S. Industrials Index. SIJ jumped 6.6% over the past week as XLI dipped 3.9%.

For more information on the industrials sector, visit our industrials category.