Not Much That's New...Still No Confluence

Bottom Line: While not on many traders’ radar screens, action in utilities can sometimes give us clues as to the direction of the broader market. With many utilities now hitting new yearly highs, it may be a positive for the market in general.

Despite the trading range the broader market has been stuck in for most of this year, there are always pockets of sector-based strength and weakness. One of those pockets of strength is utilities, as the Dow Jones Utilities Average just hit a new 52-week high.

Utilities, as a capital-intensive business, tend to rely heavily on debt and the bond market. As such, they have gone through periods of being popular and not-so-popular as a predictor of the direction of the broader stock market, since they reflect thoughts about the current and future direction of interest rates. By looking at history, we can get a better idea of whether or not watching this sector has lead to anything in particular for its broader-based cousin, the Dow Jones Industrial Average (DJIA).

The charts (and table) below outline how the DJIA performed 10, 30, 60, 90, 126 and 252 days after the Utilities hit a 52-week high or 52-week low from 1929 through the present.

Performance of the DJIA After 52-Week Extremes in the Utilities Average 1929 - 2004
	10	30	60	90	126		252
When Utilities reached a new high…
Avg Ret	0.4%	1.2%	2.6%	4.3%	5.7%		10.6%
% Pos	60%	66%	66%	73%	76%		74%
When Utilities reached a new low…
Avg Ret	-0.4%	-0.3%	0.3%	0.1%		-0.1%	5.9%
% Pos	49%	51%	51%	46%		52%	56%
Average when Utilities not at any extreme…
Avg Ret	0.3%	0.8%	1.6%	2.3%	3.4%		7.2%
% Pos	57%	59%	61%	62%	64%		66%

From the charts and table, we can see that 90 days after the Utilities hit a new 52-week high, the DJIA was higher 73% of the time, with an average return of 4.3%. This equates to an average annual return of just over 12%. Conversely, after the Utilities hit a new yearly low, the DJIA was higher only 46% of the time, and the average return was a lowly 0.1% - which translates into an average annual return of around 0.3%. Disparities are also apparent among the other time frames, with the DJIA performing better than average after Utilities hit new highs.

The fact that Utilities are hitting new yearly highs can be considered something of a proxy for the health of rate-sensitive stocks (there are many other factors involved, and this is a gross simplification, but it helps to visualize the interaction this way). When those types of stocks are doing well, generally it is a good sign for the broader market. We can see from the data above that even out to a year later, new highs in Utilities lead to a positive DJIA three out of four times. The current new high in Utilities is not a reason unto itself to be bullish on non-related stocks, but generally it is a positive factor.

In the intraday comments yesterday afternoon, I noted the extreme oversold nature of a particular technical indicator, something that was unique historically and strongly suggested that traders not press the short side. The rebound since then has served to push a couple of our intraday measures for the Nasdaq back into severe overbought territory. About the only time these types of readings do not coincide with weakness going forward is when we are coming out of an intermediate-term low. I figure that’s an unlikely scenario at this point, so it seems as though it may be difficult for that index to make (and sustain) much more headway in the short-term. The charts below are a snapshot of a few of the intraday charts updated here throughout the day.

As I noted last time, it appears as though the idea of a trading range has received wide acceptance. We are not seeing nearly the type of sentiment readings we saw in March or May, despite prices being not far from those levels. It would be much more healthy to see some actual pessimism build along with declining prices, but so far we have not seen much of that. If price action improves considerably, it may make sense to once again establish some intermediate-term long positions, but from the current status of most of our readings, there should be a better time at which time a good risk/reward scenario will present itself.

This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.