Utilities Flash Another Sell Signal

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Stocks advanced Wednesday following positive economic reports and news about the negotiations between Greece and its creditors. But even though all major indices showed gains, they were modest and volume was light.

The Dow Jones Transportation Average rose 1.2%. The technology sector gained 0.2%, but the PHLX Semiconductor Index lost 0.6%. Energy stocks fell 0.7%, and utility stocks sold off 1.5%.

Wendys Co (NASDAQ:WEN) said it would buy back up to $1.4 billion in shares, a third of its market capitalization, by the end of 2016, and raised its earnings guidance. The stock gained 3.3%.

The ADP National Employment Report showed private sector job creation rose to 201,000 in May where 200,000 was expected. The trade deficit fell to $40.9 billion versus an estimated $44 billion. The ISM non-manufacturing index declined to 55.7 in May from 57.8 in April, where a drop to 57.1 was expected.

Oil prices slid with light, sweet crude for July settling at $59.64 a barrel, down 2.6%. Gold fell to a three-week low at $1,184.90 an ounce, off 0.8%.

At Wednesday’s close, the Dow Jones Industrial Average rose 64 points to 18,076, the S&P 500 gained 4 points at 2,114, the Nasdaq rose 23 points to 5,099, and the Russell 2000 was up 13 points at 1,265.

The NYSE’s primary market traded less than 670 million shares with total volume of 3.1 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, advancers and decliners were almost even, and on the Nasdaq, advancers led by 2.2-to-1.

Nasdaq Chart
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Chart Key

For those who are encouraged by the “soldiers leading,” Wednesday was a banner day. The Nasdaq is close to a new high. Resistance is at the top of a trading band at 5,119.

But don’t become too excited about chasing smaller-capitalization stocks just yet. MACD is curling down, and with a prior failure to break out as recently as last week, I’d wait until another new high is confirmed before jumping aboard.

Dow Jones Utility Average Chart
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I don’t always show the same chart on consecutive days, but when a strong, negative event occurs, I want readers to be aware of it. The Dow Jones Utility Average flashed a death cross in early May, followed by a sell signal from my proprietary indicator, the Collins-Bollinger Reversal (CBR). And on Wednesday, MACD flashed a sell signal.

In the previous Daily Market Outlook, I implored those who have purchased stocks strictly for a high yield with weak fundamentals to sell those positions since the chart of the Dow Jones Utility Average appears to be breaking down.

Conclusion

Even though we are still under the cloud of a possible Dow Theory non-confirmation, the threat of a Dow Theory sell signal is far from being executed.

Raymond James’ Chief Investment Strategist Jeff Saut pointed out that the Dow industrials would have to close below their mid-October low in order to receive an outright Dow sell signal. And as he said, we are a long way from that happening.

As far as Dow Theory is concerned, a yellow flag is flying, but the red flag is still furled. Perhaps, technically, the Dow non-confirmation is a reason for the hesitation to break out with gusto. However, on the basis of a non-confirmation, there is no technical reason to clear out portfolios.

However, the Dow Jones Utility Average is clearly telling us that there is a problem with low-to-mid-quality income stocks. Some of these issues, especially REITs and oil and gas LPs, are at risk. And mid-to-low-quality bonds (even municipals) should be sold.

A Fed governor warned last week that interest rates will increase and investors had better “get the word since it’s going to happen.” Even if he didn’t say when, the warning is clear, and ignoring it could be costly.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2015/06/daily-market-outlook-utilities-flash-another-sell-signal/.

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