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Are Utilities Warning of a Correction Ahead?
The bull market is alive and well. Too bad it's the bull market in utilities.
Michael A. Gayed    

Warning. Live without warning.
-- Green Day
 
With the correction in small caps over as those stocks attempt to push for new highs, all seems well yet again in markets. The S&P 500 (INDEXSP:.INX) is hovering around new all-time highs, while the average stock is flat to slightly up for the year.  Much like a Pavlovian dog that salivates at the sound of a bell, it is almost considered a given that stocks are likely rally no matter what the Fed says, so long as the words "extended period of time" are stated.
 
There's a sticky problem though. This late into the cycle, bond yields are still extremely low and not really rising. Treasury Inflation Protected Securities (TIPs) have not broken out, signifying ongoing doubts about reflation. Housing continues to be stop-and-go, which in turn is dampening the wealth effect and consumer demand expectations. Put simply, while absolute price is anticipating a wonderful economic environment ahead, relative price is not.
 
In our 2014 Dow Award Winning paper An Intermarket Approach to Beta Rotation, Charlie Bilello and I showed that the utilities sector, when it's outperforming, tends to do so prior to VIX (INDEXCBOE:VIX) spikes and corrective environments for equities.  Take a look below at the price ratio of the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) relative to the S&P 500 ETF (NYSEARCA:SPY).  As a reminder, a rising price ratio means the numerator/XLU is outperforming (up more/down less) the denominator/SPY.  Note that utilities could still very well be in an uptrend, and that outperformance may be on the verge of returning.



That isn't exactly an encouraging sign.  Historically, utilities since 1926 have outperformed prior to volatile junctures because "smart money" lowers beta exposure in anticipation of a deflation pulse. Utilities are an input in my firm's ATAC (Accelerated Time and Capital) models used for managing our equity and absolute return mutual funds and separate accounts.  We are close to another defensive rotation.  With many claiming that "sell in May and go away" has failed this year, it's worth considering that the only way to know if the saying holds true for 2014 is after October, when the "worst six-month period" for stocks is over.  A correction may yet be lurking around the corner, and utilities seem to be anticipating that fragility still remains in the near future.

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Michael A. Gayed
Are Utilities Warning of a Correction Ahead?
The bull market is alive and well. Too bad it's the bull market in utilities.
Michael A. Gayed    

Warning. Live without warning.
-- Green Day
 
With the correction in small caps over as those stocks attempt to push for new highs, all seems well yet again in markets. The S&P 500 (INDEXSP:.INX) is hovering around new all-time highs, while the average stock is flat to slightly up for the year.  Much like a Pavlovian dog that salivates at the sound of a bell, it is almost considered a given that stocks are likely rally no matter what the Fed says, so long as the words "extended period of time" are stated.
 
There's a sticky problem though. This late into the cycle, bond yields are still extremely low and not really rising. Treasury Inflation Protected Securities (TIPs) have not broken out, signifying ongoing doubts about reflation. Housing continues to be stop-and-go, which in turn is dampening the wealth effect and consumer demand expectations. Put simply, while absolute price is anticipating a wonderful economic environment ahead, relative price is not.
 
In our 2014 Dow Award Winning paper An Intermarket Approach to Beta Rotation, Charlie Bilello and I showed that the utilities sector, when it's outperforming, tends to do so prior to VIX (INDEXCBOE:VIX) spikes and corrective environments for equities.  Take a look below at the price ratio of the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) relative to the S&P 500 ETF (NYSEARCA:SPY).  As a reminder, a rising price ratio means the numerator/XLU is outperforming (up more/down less) the denominator/SPY.  Note that utilities could still very well be in an uptrend, and that outperformance may be on the verge of returning.



That isn't exactly an encouraging sign.  Historically, utilities since 1926 have outperformed prior to volatile junctures because "smart money" lowers beta exposure in anticipation of a deflation pulse. Utilities are an input in my firm's ATAC (Accelerated Time and Capital) models used for managing our equity and absolute return mutual funds and separate accounts.  We are close to another defensive rotation.  With many claiming that "sell in May and go away" has failed this year, it's worth considering that the only way to know if the saying holds true for 2014 is after October, when the "worst six-month period" for stocks is over.  A correction may yet be lurking around the corner, and utilities seem to be anticipating that fragility still remains in the near future.

Twitter: @pensionpartners
< Previous
  • 1
Next >
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Michael A. Gayed
Daily Recap
Are Utilities Warning of a Correction Ahead?
The bull market is alive and well. Too bad it's the bull market in utilities.
Michael A. Gayed    

Warning. Live without warning.
-- Green Day
 
With the correction in small caps over as those stocks attempt to push for new highs, all seems well yet again in markets. The S&P 500 (INDEXSP:.INX) is hovering around new all-time highs, while the average stock is flat to slightly up for the year.  Much like a Pavlovian dog that salivates at the sound of a bell, it is almost considered a given that stocks are likely rally no matter what the Fed says, so long as the words "extended period of time" are stated.
 
There's a sticky problem though. This late into the cycle, bond yields are still extremely low and not really rising. Treasury Inflation Protected Securities (TIPs) have not broken out, signifying ongoing doubts about reflation. Housing continues to be stop-and-go, which in turn is dampening the wealth effect and consumer demand expectations. Put simply, while absolute price is anticipating a wonderful economic environment ahead, relative price is not.
 
In our 2014 Dow Award Winning paper An Intermarket Approach to Beta Rotation, Charlie Bilello and I showed that the utilities sector, when it's outperforming, tends to do so prior to VIX (INDEXCBOE:VIX) spikes and corrective environments for equities.  Take a look below at the price ratio of the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) relative to the S&P 500 ETF (NYSEARCA:SPY).  As a reminder, a rising price ratio means the numerator/XLU is outperforming (up more/down less) the denominator/SPY.  Note that utilities could still very well be in an uptrend, and that outperformance may be on the verge of returning.



That isn't exactly an encouraging sign.  Historically, utilities since 1926 have outperformed prior to volatile junctures because "smart money" lowers beta exposure in anticipation of a deflation pulse. Utilities are an input in my firm's ATAC (Accelerated Time and Capital) models used for managing our equity and absolute return mutual funds and separate accounts.  We are close to another defensive rotation.  With many claiming that "sell in May and go away" has failed this year, it's worth considering that the only way to know if the saying holds true for 2014 is after October, when the "worst six-month period" for stocks is over.  A correction may yet be lurking around the corner, and utilities seem to be anticipating that fragility still remains in the near future.

Twitter: @pensionpartners
< Previous
  • 1
Next >
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Michael A. Gayed
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