Trader’s Narrative

Towards the end of May I wrote about the utility sector being oversold, the next day it had a snap back technical rally. Here’s an update on the sector.

If it wasn’t clear, I wanted to emphasize that there is a difference between a technically oversold, short-term snap back rally and a deep oversold condition which results after a prolonged and steep decline. The former can be only caught by nimble traders while the latter by position traders who want to catch intermediate moves.

Looking at the technical picture of the Utilities Select SPDR (XLU), I don’t think we are seeing any sort of intermediate bottom - atleast not the kind we’ve seen before. The bullish percent moved sharply lower from 96.25% to 83.33%. It only goes to show how strong this sector is that such a decline leaves it still at a historically high bullish percent reading.

The last intermediate bottom in this sector was in last summer when the BP reached a low of 67%. Historically, we’ve seen much, much lower BP readings form bottoms. In September 2001, there was a BP reading of 23.26%, in July 2002, 13.33% and October 2002, 20%. In keeping with the characterstic of strong bull markets, we have been able to launch further up moves from shallow oversold.

Looking at the percentage of stocks in the sector above their moving averages:

• 57% are above their 200 day MA - a real washed out would be around 20%
• 10% are above 50 day MA - lower than the 20% reading last summer
• only 1 utility stock is above its 10 day MA

So basically, in the short term, the utilities sector is stretched into oversold territory. But by any longer term measure, things are not as extreme. If you’re a nimble trader, you can catch short term moves but as a position trader or longer term investor, eventhough it is off its highs, I don’t think this is the time to add fresh money to this sector.

Yesterday I wrote about utility stocks being on sale. Today most of them gapped up in a technical snap back but finished the day poorly.

Still for nimble traders there was ample opportunity to take advantage of the short term oversold condition in this sector. Here are two charts from FPL Group (FPL) and Entergy (ETR) which are representative of what happened in this sector today:

We still have quite a ways to go to fully work out this oversold condition. Eventhough it won’t be straight up to new highs, this sector bears watching. Especially the high prices stocks which present good low risk opportunities when they contract in range and volatility.