The Industrials index makes up about 272 billion in market capitalization. This represents almost 5% of the TSX market capitalization. Some Canadian companies you may recognize are BFI Canada Income Fund, Bombardier Inc., CAE Inc., Canadian National Railway Company, Canadian Pacific Railway Limited, Finning International Inc., SNC-Lavalin Group inc. and Westjet Airlines Ltd..

The Industrials sector closed at $114.24 on Monday August 11, 2008. In the last year, the 52-week high was $121.33 on June 5, 2008 and the low occurred on January 22, 2008 at $91.22. Until the double top on May 16, 2008 and June 6, 2008, the increase in price from the low to high was 26.5%. This represents about an 8% out performance relative to the TSX and a 19.4% out performance relative to the S&P 500. After June 6, 2008 the price declined –14%, bottoming on June 15, 2008. Subsequently we saw a rise of 9.2% from the last bottom in June to present. In the month of July they contributed to 1.9% of the points on the TSX, even though the TSX was down 5%. On August 5, 2008 the current price rose above the 50 day moving average giving us a buy signal. The next point of resistance is at $114 and if it doesn’t break through this point, we would become bearish.

From a fundamental standpoint, valuations are attractive with an average price-to-earnings ratio of 12.12. Although there are many growth stocks within the industrials sector, the average dividend yield is 2.21 so there are also some high dividends paying stocks within this sector. The most recent upward move in the sector has more to do with falling commodity prices, more specifically falling oil prices. This appears to be negatively correlated to oil so could be added as a diversifier in your portfolio. Be cautious though because the driver behind falling commodity prices could be due to short-term forces. One trend is an unwinding carry trade (borrowing in low-yield currencies such as the Yen and buying into high-yielding commodity currencies such as Canada or Brazil). As a side note, this has led to a rising US dollar. The second issue is an unwarranted shift to financials, which looks to me like a 6 year old gunfighter that can’t get his gun out of his holster fast enough.

Both technical and fundamental forces suggest industrials are moving in the right direction. Watch the technicals because the upward trend has not been well established yet. If we have a reversal in commodities, things will become bearish for industrials pretty quick.