Sector Return Model Year-to-Date Shows Strange Behavior in Utilities

For those who follow the Sector Rotation Model, or at least look at Sector Returns to determine a sector's relative performance to the S&P 500, you might have noticed something strange with Utilities recently.

However, even if you're not at all interested in the sector that is often considered the most 'boring' of the nine (with technology being the most exciting), it's still worth looking at the Sector Performance year-to-date numbers to see what that says about the broader market trend.

Let's see the current chart.

When looking at sector performance, it's important to segment the nine sectors into "Aggressive" or "Offensive" sectors (which outperform when the market is in "all clear" mode) and then "Defensive" or "Conservative" sectors (which often 'hold their own' or outperform relative when the market is swinging to the downside.

I've labeled the chart above according to this model, with Energy (NYSE: XLE) as its own island in the model.

With the recent market downturn since the January 19th peak, we are seeing exactly what the model would tell us to expect, in terms of "aggressive" sectors underperforming the SP500 while the "conservative" sectors are outperforming it on a relative basis.

That is... until you look at Utilities (NYSE: XLU), which have fallen 7.3% from the start of 2010.

The 7% declines so far in Materials and Technology are in-line with the model, given that the S&P 500 has declined 4.2% during the same period.

You can see also that the Health Care and Consumer Staples - both defensive - have held their own, having both declined 'only' 1% each.

The utilities sector should have done the same, or at least outperformed the S&P 500.

This is the current "fly in the ointment" of the sector rotation model, and it bears greater scrutiny.

The Utilities Sector actually peaked on December 14th, 2009 with a spike doji reversal candle before falling over 10% from the high, challenging the 200 day SMA at $28.50.

We're seeing bullish candles - including hammers - form at this critical 'line in the sand' boundary, which is also above the round number $28.00 zone.

Any price move under $28.00 would almost certainly send prices lower, which would break all logical zones.

We're not there yet - buyers have a very good chance of bouncing prices up from the $28.50 lows, but it's worth watching for further clues as to what's going on with this sector.

Remember, Utilities - along with Financials - are among the most "Interest Rate Sensitive" sectors, and any hint of higher interest rates sends utility sector investors scrambling (that's because many utilities companies have high debt loads and are sensitive to increases to their interest rate they pay, which cuts directly into profits).

Keep watching not only Utilities, but the disparity between the Defensive and Offensive sectors for opportunities, as seen above.

Corey Rosenbloom, CMT

Afraid to Trade
http://blog.afraidtotrade.com