While we have been a little early, we are currently SHORT Industrials (XLI) in the Hedgeye virtual portfolio. Our short thesis is grounded on the belief that a weakening labor market, softening consumer confidence, softening housing activity and retail sales, and an intensifying trade deficit are early signs of a renewed economic downturn.
We want to be short the stocks that are most levered to global industrial growth slowing. As a reminder, we remain below consensus for US GDP growth in the coming quarters and years.
The following charts show investor sentiment of the components of the Industrials index (XLI). Specifically, we are looking at “sell-side bullishness” versus “short interest days to cover.”
(1) High Sentiment & Low Short Interest = Consensus Longs/Potential Shorts (upper left)
(2) Low Sentiment & High Short Interest = Consensus Shorts/Potential Longs (lower right)
The Industrial sectors with the most bullish sentiment are Industrial Conglomerates, Machinery, Aerospace & Defense, Road and Rail and Air Freight.
Howard Penney
