Utilities: From Hero to Villain?

Advertisement

I’ve written a couple of articles here on InvestorPlace highlighting the strength the utilities sector started exhibiting in early April, which is around the time I began arguing in my various writings online that a “mini-correction” was likely.

I have maintained a consistent belief that 2012 could play out like 2003 and 2009 in terms of being a year of reflation, and the most recent spike upwards in risk assets seems to confirm that this is a very real possibility.

Despite a powerful negative narrative and the fear that the bond market has expressed through panic low yields, year-to-date, the S&P 500 Index is as of this writing up over 6%.

In many ways this seems shocking as the “mini-correction” has felt much worse than it actually was. I have argued in various interviews (which can be seen at youtube.com/pensionpartners) that resiliency is a key component of a bull market. If investors begin to wake up to this fact, then the utilities sector, which has performed quite strongly in the last two months, goes from being a sector to hide in to being a sector to flee from.

Take a look below at the price ratio of the iShares Dow Jones US Utilities ETF (NYSE:IDU) relative to the Dow Jones Industrial Average (DIA). As a reminder, a rising price ratio means the numerator/DIA is outperforming (up more/down less) the denominator/DIA.
Click to Enlarge

Notice the strong period of strength utilities exhibited on the far right of the chart. I have drawn in what has historically acted as a “ratio resistance” line, after which stocks tend to perform better as fear subsides and money favors more aggressive sectors.

I suspect a period of renewed weakness in utilities is at hand given that it has outperformed so strongly despite equities holding up well and in the face of very bearish news and sentiment.

Utilities were in many ways a hero sector to stand behind, but every now and then the hero turns to heel and betrays those who had believed in the (bearish) story the most.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

InvestorPlace readers that are new subscribers to the The Lead-Lag Report can receive a 30% discount.


Article printed from InvestorPlace Media, https://investorplace.com/2012/06/utilities-from-hero-to-villain/.

©2024 InvestorPlace Media, LLC