Following one of the best weeks of the year, stocks paused Monday to regroup while awaiting earnings from several influential stocks and a policy statement from the Federal Open Market Committee.
The Energy Select Sector SPDR ETF (XLE) fell 2.1% after Goldman Sachs Group Inc (GS) cut its forecast for oil prices, saying key benchmarks would trade as low as $70 to $80 a barrel in the second quarter of 2015. Crude oil futures declined 0.4% to close at $80.66 a barrel.
Merck & Co., Inc. (MRK) fell 2% after beating analysts’ earnings estimates but missing revenue expectations. Allergan, Inc. (AGN) lost 1% despite reporting better-than-expected results. Valeant Pharmaceuticals Intl Inc (VRX) said it is prepared to raise its offer for Allergan to at least $200 a share. Twitter Inc (TWTR) fell 2.8% in after-hours trading after issuing weaker sales guidance.
So far, 213 S&P 500 companies have reported Q3 earnings. FactSet reports the index is on track for 5.6% year-over-year earnings growth, up from a previously estimated 4.5%.
Pending sales of existing homes increased by 0.3% in September after declining in August, according to the National Association of Realtors.
At Monday’s close, the Dow Jones Industrial Average gained 13 points at 16,818, the S&P 500 fell 3 points to 1,962, the Nasdaq rose 2 points to 4,486, and the Russell 2000 fell 1 point to 1,117.
The NYSE’s primary market traded 761 million shares with total volume of 3.4 billion. The Nasdaq crossed 1.6 billion shares. On the Big Board, decliners outpaced advancers by 1.3-to-1, and on the Nasdaq, decliners led by 1.2-to-1. Block trades increased slightly on the NYSE but declined on the Nasdaq.
There was much talk Monday that the utility sector is overpriced, and the weekly chart of the Utilities SPDR ETF (XLU) tends to support that argument.
This began with a Forbes article that called out the risk in the group: “Of the 41 utility ETFs and mutual funds under our coverage, 40 earn a dangerous-or-worse rating.”
This was picked up by CNBC commentators who agreed, pointing out that XLU outperformed this year as a result of the public’s fear of stocks in general and search for safety in a traditionally stable group.
With XLU trading at the top of its monthly chart that spans six years, it is not likely to sustain a further breakout. But with an annualized yield of 3.5%, it is hard for investors to give up on this fund.
The danger is that the sector appears to have run its course. With a slow growth rate of less than 2% versus an estimated 5%-plus for the S&P 500, the premium now assigned to the group by investors could be quickly overcome in a rush of selling. And the losses could easily wipe out any gains from anticipated dividend income.
Conclusion
Investors in utilities have had a great run in a group that is usually stable and received high dividend income. But there is a time to sell everything, even this favored group.
The statistics are overwhelmingly against utility stocks continuing to be a top-ranked group. If you own a utility ETF and sell now, you should be cashing out close to the top.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
