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Utility Stocks On Sale at Trader’s Narrative

Utility Stocks On Sale

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?

utilities sector 2007 xlu.png

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)

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2 Responses to “Utility Stocks On Sale”  

  1. 1 Good to Go Pile . . . « Trading for the Masses
  2. 2 Utility Stocks Snap Back

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