Investors are approaching the week of trading with measured confidence after last week's monster rally pulled stocks back to their highest levels since late July.
However, even as money moves back into equities amid hopes of a U.S.-China trade deal and bets on a dovish Fed, there's one area of the market that some traders think could have some industrial-sized problems.
That area would, in fact, be the industrials. Carter Worth, head of technical analysis at Cornerstone Macro, stopped by "Options Action" on Friday to explain why.
"This has been one of the areas that has been a hope trade," Worth said. "And as they say, when you're hoping, it's hopeless. It's not a thesis, it's nothing."
As Worth would go on to point out, if you're hoping to find alpha in the industrials, you've been hopeless for a very long time.
"This line is the [2016] presidential election, and what you see is this big bump up in industrials, and here is the relative performance [to the S&P 500]. It's called the 'Trump bump,' and it happened in financials and industrials," said Worth.
"But what we know is that, that was the peak in the performance. So that actually, all of this [since then] has been a negative alpha proposition, meaning other choices one could have made were better. So the issue is, not only are we at five-year relative lows, on an absolute basis, we're back at a difficult level."
No matter how you slice it, the industrials are in rough shape from a technical standpoint. Negative alpha, stagnating absolute returns and a key resistance level seem to be conspiring against the space – and any traders with exposure to it.
"Each time that we have gotten back to this line, we have failed," Worth said of that pesky resistance level. "Now, the question is, are we going to fail yet again? We're starting to approach it again and that's my hunch. I don't think anything's changed."
But it's not just a looming resistance level that has Worth worried about the efficacy of the industrials trade. For a while – beginning with a big bounce off December's lows – the XLI Industrials ETF was performing mostly in line with the market, but now it has broken rank in a worrying way.
"I see a clear break in trend, there's no way around that," Worth said. "And now, after breaking, we have thrown back quite close to the underbelly of the line. My bet is that you will start to falter here, and I want to be short XLI."
The XLI Industrials ETF was trading slightly higher Monday.
