Industrial stocks are pacing for their best quarter in a decade, but technician warns of 'ominous' chart

Industrial stocks are leading the way for the first time in five years.

The sector's 17 percent gain this quarter means it is outpacing all other areas of the market — a position it hasn't held since the end of 2013. Its quarter-to-date gain also puts it on pace for its best quarter in a decade.

But some experts warn that these stocks may have run too far too fast, given the sector's exposure to China.

"I think the movement in the industrials really has been a sigh-of-relief rally that we're not headed into a recession. But this group is going to be really based on what happens with China. Not only the trade tariffs, but is the Chinese economy slowing in addition to or something other than the trade tariffs?" Point View Wealth Management's John Petrides said Friday on CNBC's "Trading Nation."

While he thinks there's "value to be had" in the sector, he warns that investors should be "selective." Within the space, he likes the airline stocks since he believes the economic backdrop of low unemployment and low oil will lead to an increase in air travel. The NYSE Airline index, which tracks the biggest airline companies, has gained nearly 16 percent this year.

Like Petrides, Piper Jaffray's Craig Johnson is skeptical that the industrials' record run can continue.

From a technical standpoint, he believes the sector's XLI exchange-traded fund will "go back and retest the old highs" hit in September and January 2018, but that if the sector can't break above that resistance level it could be a "triple top in the making," which is an "ominous setup."

He notes that some of the larger companies within the sector are trading at or near their all-time highs, implying that upside for the overall sector could be limited since it is market-cap weighted.

"I'm a little bit more skeptical. This has not been an area where I've been overweight with our clients. I've been looking at other areas like technology and consumer cyclicals to really play the bounce back in the market," Johnson added.

The industrial sector's 17 percent gain this year is outpacing the S&P's 10 percent gain. Within the XLI, General Electric, United Rentals and Boeing are the top performers, rising 33 percent, 31 percent and 29 percent, respectively.

Disclosure: Some clients of Point View Wealth Management own Alaska Air Group.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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