Have you ever watched a quiet contender in a race suddenly surge ahead right when everyone’s eyes are on the flashy leader? That’s exactly what’s happening in the markets right now with the industrial sector.
While tech giants grab headlines with their sky-high gains, the industrials have been grinding higher all year—up around 18% since January. That actually edges out the S&P 500’s 17% return. Yet somehow, this steady climber has stayed off most investors’ radars. I think that’s about to change, and the charts are screaming the same thing.
A Hidden Champion Ready to Shine
Let’s be real—when people talk markets in 2025, they’re usually gushing over AI, semiconductors, or the latest cloud computing breakthrough. Fair enough. The tech sector, tracked by funds like the XLK, is up a whopping 31% this year. No wonder it’s stealing the spotlight. But here’s the thing: the Industrial Select Sector SPDR Fund—or XLI for short—has been quietly building a foundation that looks an awful lot like a launchpad.
In my experience watching market cycles, the best opportunities often hide in plain sight. You don’t need explosive headlines to make money. Sometimes, all it takes is a sector that’s been ignored long enough to build real momentum under the surface. And right now? That’s industrials.
The Power of the Trading Box
Picture this: after a strong rally through July, the XLI entered what technicians call a trading box—a sideways range where prices bounce between clear support and resistance. It’s not sexy. It’s not trending on financial Twitter. But it’s powerful.
These consolidation patterns inside a longer uptrend? They’re like a coiled spring. The longer the pause, the more energy builds up. We saw something similar earlier this year—from mid-May to late June. That box followed a sharp breakout and eventually fueled the next leg up into summer highs.
Sideways action in a bull market isn’t weakness—it’s preparation.
Some might look at the XLI’s flat performance since July (up less than 1%) and think, “This thing’s stuck.” I see something different. I see a market giving the sector time to digest gains, attract new buyers on dips, and set the stage for the next move higher.
Momentum Says: This Isn’t a Top
Let’s talk indicators for a second. The 14-day RSI—a classic momentum gauge—has cooled off from overbought levels earlier this year. But here’s what matters: it hasn’t rolled over into bearish territory. It’s simply neutralized. That’s healthy.
There’s also no negative divergence—you know, when prices make new highs but momentum fails to confirm? None of that here. In fact, the absence of divergence during this multi-month pause tells me the bulls are still in control. They’re just catching their breath.
- RSI neutral, not oversold
- No price/momentum divergence
- Volume stable during consolidation
- Support holding firm at prior breakout levels
If this were the start of a reversal, we’d see cracks—lower highs in momentum, distribution days, widening spreads. Instead? We’ve got tight ranges, steady participation, and institutional footprints all over the tape. That’s not a top. That’s a base.
Zoom Out: A Multi-Year Base in Play
Now let’s pull the lens way back. If you look at the monthly chart of XLI going back to 2011, something jumps out immediately. That same trading box? It’s forming at the very top of what looks like a massive multi-year base.
We’re talking about a structure that’s been building for over a decade. And when you see price finally punch through resistance after that kind of time? History says the follow-through can be substantial.
Let me put numbers to it. Since 2011, XLI has recorded four major breakouts to all-time highs. Each one led to extended upside:
- 2013 breakout → 18 months of gains
- 2016 post-election surge → multi-year bull run
- 2020 pandemic recovery → 50%+ rally into 2021
- 2024 infrastructure push → current leg higher
Pattern recognition matters. And right now, the setup mirrors those past launches—only this time, it’s coming after years of relative dormancy compared to tech. That pent-up energy? It doesn’t just disappear.
The Tech Comparison: A Recent Divergence
Okay, let’s address the elephant in the room. Yes, tech’s been crushing it. The XLK is up 31% YTD. XLI? “Only” 18%. On the surface, that looks like underperformance. But dig a little deeper, and the story changes.
As recently as mid-September, XLI and XLK were neck-and-neck in year-to-date returns. Seriously—within a percentage point. It’s only in the last six weeks that tech pulled away decisively. That’s not a five-year trend. That’s a short-term sprint.
Markets don’t move in straight lines. Leadership rotates. And rotations often start when one group looks invincible.
– Market technician observation
Here’s a thought: what happens if the megacap tech names reporting this week—many on multi-day winning streaks—finally stumble? What if guidance disappoints even slightly? Capital doesn’t vanish. It rotates. And guess where it might flow? Into sectors coiled tight after months of consolidation. Like, say, industrials.
Relative Strength: Due for a Reversal?
Let’s look at the XLI/XLK ratio—a clean way to measure how industrials are doing versus tech. Over the past five years, this line has been in a steady downtrend. Translation: tech wins, industrials lag. That’s the macro story.
But zoom in, and you see something fascinating. Every time this ratio gets extremely stretched lower—meaning industrials have underperformed dramatically—it snaps back. And we’re there again.
Since mid-April, XLI has lagged XLK by roughly 20% over 28 weeks. That level of relative weakness? It’s only happened three other times since 2020. And each time, a reversal followed shortly after:
| Period | XLI Underperformance | Reversal Duration |
| Mid-2020 | ~22% | 12 months (strong) |
| 2022 | ~25% | 14 months |
| Spring 2023 | ~18% | 3 months (short) | ~20% | ? |
Mean reversion isn’t a guarantee, but it’s a probability. And when you combine deeply depressed relative performance with a technical breakout in the works? That’s when smart money starts paying attention.
What’s Driving Industrials Anyway?
It’s not just charts. Fundamentals matter. And beneath the surface, several tailwinds are lining up for this sector.
First, infrastructure spending. Trillions allocated years ago are finally hitting the ground—bridges, roads, rail, grid upgrades. Companies in machinery, construction, and transportation are seeing order books swell.
Second, reshoring. Whether it’s semiconductors, batteries, or defense equipment, manufacturing is coming back to domestic soil. That means factories, logistics, and industrial real estate—all core XLI holdings.
Third, defense budgets. Geopolitical tensions aren’t going away. Modernization programs for aerospace and defense contractors? Locked in for years.
- Rail freight volumes ticking higher
- Construction equipment backlogs at multi-year highs
- Electrical component demand surging with data center buildout
- Aerospace orders through 2030+
These aren’t speculative themes. They’re contracted, funded, and in motion. The market just hasn’t priced in the full magnitude yet—because everyone’s been distracted by AI hype.
How to Play It (Without Overcomplicating)
You don’t need to pick individual stocks to capture this move. The beauty of sector ETFs is simplicity. XLI gives you diversified exposure to 70+ industrial leaders—think GE, Caterpillar, Union Pacific, Honeywell, 3M.
Want to be more tactical? Watch these levels:
- Resistance: July 2025 high (~$142)
- Breakout confirmation: Close above $143 on expanding volume
- Support: $135 (top of trading box)
- Stop loss zone: Below $130 (invalidates bull case)
Personally, I’d rather buy strength than chase weakness. If XLI clears that July high with conviction, that’s your green light. Pair it with a relative strength breakout in the XLI/XLK ratio, and you’ve got confluence.
Risks? Of Course—But Manageable
No setup is bulletproof. A few things could derail this:
- Recession fears flaring up (slows capex)
- Supply chain disruptions (delays projects)
- Higher-for-longer rates (hurts financing)
But here’s the counter: many of these projects are government-backed or defense-related—sticky even in downturns. And with inflation cooling, rate cut expectations are rising into 2026. The macro backdrop? Actually improving.
The Bottom Line
The industrial sector isn’t trying to be the flashiest name in the market. It doesn’t need to. It’s been doing the work—building bases, attracting capital, aligning with long-term trends—all while tech took the spotlight.
Now, with charts flashing breakout signals, relative performance at inflection points, and real-world demand accelerating, the setup is compelling. This isn’t about predicting the future. It’s about recognizing a high-probability pattern backed by history, momentum, and fundamentals.
Sometimes the best trades aren’t the loudest ones. They’re the ones that creep up on you—until one day, you look up and realize the quiet contender just took the lead.
Keep an eye on XLI. The next leg might be closer than you think.
