The XLI Industrial ETF is up approximately 18% year to date, yet it has largely gone unnoticed through the first 10 months of the year — even while outperforming the S & P 500 (+17%). There are two main reasons for this. First, it has clearly lagged the XLK Technology ETF , which leads the market with a 31% gain year-to-date. Second, XLI has made very little net progress in recent months; since its July’25 highs, it’s currently up less than 1%. Today, we’ll take a closer look at XLI and highlight how it’s nearing a potential breakout that could also lead to renewed relative strength in the weeks ahead. This first chart illustrates the consolidation range described above, shown here as a trading box. Trading boxes are a simple way to categorize sideways price action, and when they form within a longer-term uptrend, they are typically viewed as bullish continuation patterns. We last saw a similar structure — though over a shorter duration — from mid-May to late June. That digestion followed a strong breakout earlier in May and ultimately led to the next leg higher that carried into the end of July. Some investors might view the recent inability to breakout to new highs as a negative, especially while other sectors continue to rally. However, momentum tells a different story: While the 14-day RSI has cooled from its prior extremes, it has merely neutralized, reflecting a healthy period of consolidation. Importantly, there has been no meaningful negative momentum divergence, supporting the view that this remains a pause — rather than a trend reversal. Zooming out to the monthly chart, going all the way back to 2011, the same trading range is highlighted here in yellow at the very top right corner of the chart. It has taken shape above what could be a substantial multi-year base breakout. If past behavior is any guide, this could be a meaningful start to a much bigger move. Over the years, XLI has recorded four other major breakouts to new all-time highs, and each one has led to months — and sometimes years — of additional upside follow-through. This supports a bullish scenario once again for XLI, with the current consolidation potentially serving as the next launching pad for trend continuation. The next question is whether investors should rotate into XLI, given that it has recently trailed technology, as discussed above. While the performance gap is notable, it is actually a very recent development. Remember, XLI has been directionless for a few months, but as recently as mid-September, XLI and XLK were nearly identical in year-to-date performance. It’s only over the last several weeks that technology has begun to materially outperform again. With many of the most influential megacap technology and growth companies reporting earnings over the next two days — and several already extended after multi-day winning streaks — there is a risk that the momentum in that trade could start to fade. Should that occur, capital may begin to rotate back into sectors that are just now attempting to break out of substantial bases — such as XLI. This final chart highlights the XLI vs. XLK relative performance ratio. As is clear, this ratio has been in a steady downtrend for the past five years, meaning technology has consistently outperformed industrials over that period. However, there have been multiple points where the ratio has reversed higher, favoring industrials — often after a significant stretch of underperformance by XLI. It’s been 28 weeks since the XLI/XLK last peaked in mid-April. Since then XLI has underperformed XLK by roughly 20%. Notably, this degree of underperformance over a 28-week period has happened three other times since 2020, each highlighted on the chart. In those instances, the reversals resulted soon thereafter each time: Mid-2020 through mid-2021 Most of 2022 into early 2023 And a shorter bounce in spring 2023 before XLK regained leadership Given how deeply depressed this relative performance line has become again, history suggests that we may be near another mean-reversion inflection point — potentially favoring XLI soon. — Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . 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This sector is beating the S&P 500 and is set for even greater outperformance, charts show
