The overall stock market hasn’t been going anywhere since December. That’s when the Dow Jones Industrial Average first hit the 18,000 level — a level that it has been struggling to stay above ever since.
But beneath the surface, stocks are actually weaker. Much weaker.
The Dow Jones U.S. Utilities Index is down more than 16% from its January high. The Dow Jones Transportation Average is down nearly 12%. Just 62.5% of the stocks in the S&P 500 are in uptrends compared to 75% as recently as April.
For a variety of reasons, a growing number of stock market sectors are rolling over into downtrends — suggesting that the broader market is increasingly vulnerable to a correction of the type we haven’t seen in months.
If so, here are five stock market sectors to avoid (as represented by popular, inexpensive ETFs):
Stock Market Sectors to Avoid: Utilities SPDR (XLU)
Rising long-term interest rates, as the bond market prices in higher inflation, stronger economic growth, and the approach of the Federal Reserve’s first interest-rate hike since 2006 later this year has pummeled yield-sensitive utility stocks.
The Utilities SPDR (XLU) — a major ETF that holds many of the major utilities — has broken to fresh lows, dropping to levels not seen since October.
Stock Market Sectors to Avoid: iShares Transportation Average ETF (IYT)
Transport stocks, on the surface, should be benefiting from the combination of faster economic growth and lower energy prices. Instead, revenue growth is stalling investors are bailing out.
The iShares Transportation Average ETF (IYT) closed at levels not seen since October as the sector has been under increasing pressure since FedEx (FDX) reported disappointing results on June 17. Worse, the IYT sliced below a two-month support line.
Stock Market Sectors to Avoid: Energy SPDR (XLE)
Energy stocks have been drifting lower since April — despite stability in crude oil near $60 a barrel — as investors realize that the temporary support provided by the summer driving season has encouraged a surge of production increases from U.S. shale producers and the Saudis. When autumn arrives, inventories will swell and prices likely will weaken.
As a result, the Energy SPDR (XLE) is threatening to fall below its monthlong support level and drop back to March lows.
Stock Market Sectors to Avoid: Industrial SPDR (XLI)
On Thursday, the core of the stock market — industrial stocks — rolled down and out of a consolidation range going back to November on Thursday. With that, the Industrial SPDR (XLI) closed below its 200-day moving average for the first time since October.
This is a serious sign that the divergence between the three big sector groups of Dow Theory — industrials, utilities and transportation — could be set to close, with industrials joining the other two to the downside.
Stock Market Sectors to Avoid: iShares U.S. Real Estate (IYR)
And finally, real estate stocks are coming under pressure as well. The iShares U.S. Real Estate (IYR) is threatening to fall below their June low to return to levels not seen since October — as they too are sold off in response to rising long-term interest rates.
Real estate stocks, mainly REITs, are yield-sensitive. When rates rise, they tend to wilt, much like utility stocks.