Trading Nation

Watch this industrial stock as a guide to the sector's next move, Miller Tabak says

Industrials stocks have led rally this month, and traders watching two names

Industrials are getting back into gear.

The XLI industrial ETF has risen by 16% over the past month, leading the S&P 500's 9% gain. Investors have bet on the economically sensitive group as one of the first to benefit from the recovery from the coronavirus pandemic.

Matt Maley, chief market strategist at Miller Tabak, is using Caterpillar as a barometer for where the entire sector heads next.

"It's acted very, very well. Back a couple months ago, it made a distinguished, material higher low. And then when it bounced back, not only did it make a higher high but it made a very meaningful one," Maley told CNBC's "Trading Nation" on Wednesday.

The one concern, he says, is the stock became overbought on a near-term basis, suggesting a pullback could be on the horizon. Its relative strength, a momentum measure, hit nearly 74 earlier this week — any reading above 70 suggests overbought conditions.  

"The key is going to be what happens next. Does a stock like Caterpillar come down and break below its 200-day moving average in any meaningful way? That would signal that the stocks have gone way too far ahead of themselves and the industrial economy is not going to bounce back as quickly as the consumer economy," said Maley.

If the stock holds its 200-day moving average to bounce above highs seen last week, it could indicate growing momentum in the industrials space.

"We won't know today or tomorrow, but we should know within the next couple of weeks," Maley said.

 Mark Tepper, president of Strategic Wealth Partners, says it pays to be picky in the industrials sector. One stock he likes is Raytheon Technologies as low investor expectations and high pessimism could mask opportunity. 

"That is definitely a stock with some blemishes. I think a lot of investors would prefer to steer clear of this thing right now because of the aerospace exposure, but we feel it's a bit overblown. I do think that cash flow is going to be weak here in the short term, but it should start to rebound in the second half of the year," Tepper said during the same segment.

Raytheon has rallied 16% this month. It remains 23% lower for the year. 

"From my perspective, you're getting a company where damaged air travel is priced in and there is room for some upside surprise there," said Tepper. 

Disclosure: Strategic Wealth Partners holds Raytheon.