Trader’s Narrative

I’ve never seen the bullish percent for so many sectors hit extreme oversold levels as now. Refer to my previous post for a review of how I use to time the market with bullish percent charts.

Lets start out with the bullish percent chart for the S&P 500 index:

The broad market proxy is now lower than it has ever been during the most recent bull market. The same can be said of the NYSE bullish percent and the Nasdaq bullish percent indices. With the former hitting the low 30%, a level it had only reached 6 other times since the early 1990’s. Each time we’ve seen this level, a significant market bottom formed.

I mentioned that the transports were approaching oversold bullish percent levels around 30%. Last week it hit its low of 15%. And now I hear that Buffett has been nibbling in the sector.

I was surprised to see the materials sector index so low:

But there it is, signalling an extremely oversold condition. The industrials sector bullish percent is just a tad lower to 13%:

And finally, one of the strongest sectors during this bull market, the energy sector, didn’t get away unscathed:

Looking through these sectors it is easy to spot that we are at an inflection point here. And with so many sectors oversold, it is convincing also that the general market has reached an exhaustion point in selling.

I left out one area of the market because it should be obvious, especially if you’ve been a regular reader: the financial sector. As I suggested before, the financial stocks has borne the brunt of the selling during this decline and their bullish percent chart as well as other technical indicators point to an amazing buy opportunity.

Before I delve into the current state of the utilities sector, allow me to do some accountability and revisit my last post: Deceptive Relative Strength in Utilities. That was at the end of July 2006 and the best that my bearish call on the sector did was see it trade flat for the next two months. To be fair, I didn’t call for a short outright but still, after that pause the utilities continued up and rose 27% (just before a tumble last week). I’d give that call a C+. But I’m biased

So how about right now?

Well lets take a look at the technical picture of the sector (as defined by the Utilities Select SPDR: XLU):

• 3.33% above 10 day moving average
• 20% above 50 day moving average
• 83% above 200 day moving average
• all time high volume on Thursday (May 24th 2007) 14.9 million shares
• bullish percent (of S&P Utilities Sector Index) very high at 94%

According to this Lowry’s breadth study, when 10% or less stocks are above their 10 day moving average, it is a reliable indicator of a deeply oversold market. While this study was for the general market, I think it is safe to make inferences for sectors as well. Right now we are seeing an unheard of 3% of utilities stocks above their 10 day moving averages. If you look at no other indicator, this by itself should be flashing a red light warning of a snap back rally.

The other percentage above moving averages are showing an oversold market on the medium term (50 day moving average) but long term (200 day moving average and bullish percent), the sector is in a robust bull market. Finally the spike in volume for the sector ETF can be interpreted two ways: there is a lot of emotion as people panic and dump their shares, and two, people are fleeing the danger of individual stocks (higher risk) for the relative safety of an ETF (basket of stocks).

Putting all this together, I think we are about to see a technical snap back in the utilities sector. I’m putting the really oversold ones on my watchlist for this week. They may even present good intraday opportunities.

Some suggest that the message of the market in the sudden decline of the sector is that the Fed is going to raise rates. I don’t read that much into it. The sector was obviously overbought and needed to pull back. Just look at its distance from its long term moving average (200 day). I actually wouldn’t be surprised by a rate cut - but then again, what do I know?

Here are the components of the Utilities Select SPDR (XLU) in order of index weight:

Exelon Corp. (EXC)
TXU Corp. (TXU)
Dominion Resources Inc. (D)
Southern Co. (SO)
FPL Group Inc. (FPL)
Duke Energy Corp. (DUK)
Entergy Corp. (ETR)
FirstEnergy Corp. (FE)
Public Service Enterprise Group Inc. (PEG)
American Electric Power Co. Inc. (AEP)
Edison International (EIX)
PG&E Corp. (PCG)
PPL Corp. (PPL)
Sempra Energy (SRE)
Constellation Energy Group Inc. (CEG)
AES Corp. (AES)
Progress Energy Inc. (PGN)
Consolidated Edison Inc. (ED)
Ameren Corp. (AEE)
Xcel Energy Inc. (XEL)
DTE Energy Co. (DTE)
Questar Corp. (STR)
Allegheny Energy Inc. (AYE)
KeySpan Corp. (KSE)
NiSource Inc. (NI)
CenterPoint Energy Inc. (CNP)
Pinnacle West Capital Corp. (PNW)
Integrys Energy Group Inc. (TEG)
CMS Energy Corp. (CMS)
Dynegy Inc. Cl A (DYN)
Teco Energy Inc. (TE)
Nicor Inc. (GAS)