Trading Nation

Three reasons industrials could spike, and one that points to more pressure

As industrials tumble on trade fears, technician defends the sector's bull case

Trade war tensions are on the rise, hitting the globally sensitive industrials stocks hard.

Despite the uncertainty, one technical analyst sees an opportunity to buy the dip.

"We would use this market pullback to increase exposure to industrials to overweight. We think it's one of the more attractive sectors as it stands. There's three reasons for it," Oppenheimer head of technical analysis Ari Wald said Monday on CNBC's "Trading Nation."

The first reason, he said, is that the sector has improved relative to the broader market — forming a base that acts as stabilizing support.

The XLI industrial ETF is also showing improving internal strength, Wald said.

"On an equal-weighted basis, it's been even stronger," he said. "The average industrial stock is showing relative strength. We aim to identify sectors that are showing broad-based leadership, we think this is the case for industrials."

Lastly, underperformance against the over a one-year period is often followed by a 12-month stretch of outperformance, Wald said.

"The sector has tended to mean revert over longer periods. We did a study in our recent report showing that following periods of underperformance over the prior year, which is the case for industrials right now, they've underperformed the last 12 months, they've tended to post above average returns over the coming year, over the next 12 months," he said.

Historically, the XLI ETF has averaged a 14% rate of change in the 12 months after it has underperformed the market, according to Oppenheimer data.

"When you add it all up, I think you use these market pullbacks to buy pro-cyclical sectors like industrials because we think a new bull cycle is emerging given the broadening participation the world over," said Wald.

But Gina Sanchez, CEO of Chantico Global, told CNBC there's one big reason she sees a rebound in industrials as unlikely in the short term.

"The bigger challenge is trade talks and just the outlook for trade. Trade has been cyclically turning down for the last 12 months and that makes a lot of sense as to why the industrials have been getting hit and I don't see that necessarily picking up in the next 12 months," Sanchez said on the show Monday.

The outlook worsened on Monday, a day after President Donald Trump threatened to impose new tariffs on even more Chinese goods.

"We were assuming that trade talks were going to conclude — they may not be great but they wouldn't be bad and that once we lifted that uncertainty then markets would bounce from there," said Sanchez. "We added a new twist into that story and actually threatened the outlook for that, and I think right now is not the time to make that binary bet because it's more unclear than ever."

The XLI ETF, which holds Boeing and Caterpillar, is up 7% in the past 12 months, while the S&P 500 has added 10%.