Utilities: Back to Hero, or Villain in Disguise?

by Michael A. Gayed | July 16, 2012 11:50 am

“Damn you villains, who are you? And from whence came you?” – Edward Teach, aka Blackbeard

I’ve talked about the relative performance of Utilities to the S&P 500 quite a bit in the past several months here on InvestorPlace as a way of identifying market sentiment and risk mood.  The Utilities sector tends to behave in line with other “bear trade sectors” — such as healthcare via the Health Care SPDR ETF (NYSE:XLV[1]), consumer staples via the Consumer Staples Select Sector SPDR ETF (NYSE:XLP[2]), and telecom via the iShares Dow Jones US Telecom ETF (NYSE:IYZ[3]) — given its low cyclical and high dividend characteristics.

The bear trade began to outperform in April[4] right before the May mini-correction[5] took place, and began rolling over[6] right as the June ramp-up occurred. Since July 5, the bear trade has come back in terms of overall momentum.

Since July 5, the bear trade has come back in terms of overall momentum.

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Take a look at the price ratio of the Utilities Select Sector SPDR ETF (NYSE:XLU[7]) relative to the iShares S&P 500 Index ETF (NYSE:IVV[8]). As a reminder, a rising price ratio means the numerator/XLU is outperforming (up more/down less) the denominator/IVV.

Notice that historically, this ratio tends to trend well, with the exception of the months post Summer Crash of 2011 and the most recent last several months. What’s curious about the more recent stubbornness in the strength of utilities is that there has been quite a bit of stimulus announced the last several weeks, as the U.K., U.S., BoE, ECB, South Korea, China and Brazil have all eased monetary policy. This should awaken animal spirits, but instead seems to have spooked investors.

Could this be but a temporary period of strength back in the bear trade, or a final move before breaking down as the ratio did in the first quarter? For those looking for a way of gauging what happens next, likely plays out.

Michael A. Gayed, CFA is Chief Investment Strategist at Pension Partners, LLC, an investment management firm which uses quantitative strategies to buy and rotate across various ETFs in an effort to generate absolute returns.

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.

  1. XLV: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLV
  2. XLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLP
  3. IYZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYZ
  4. began to outperform in April: https://investorplace.com/2012/04/utilities-from-hero-to-zero-and-back-again/
  5. May mini-correction: https://investorplace.com/2012/05/utilities-from-hero-to-superhero/
  6. began rolling over: https://investorplace.com/2012/06/utilities-from-hero-to-villain/
  7. XLU: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLU
  8. IVV: http://studio-5.financialcontent.com/investplace/quote?Symbol=IVV

Source URL: https://investorplace.com/2012/07/utilities-back-to-hero-or-villain-in-disguise/
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