Over the weekend I was going through all of my favorite charts, making annotations and writing down notes. One of the things I like to do to get a good feel for the US stock market is to rip through all of the S&P sectors and sub-sectors on multiple time frames to get a good read on money flow. Which ones are the strong sectors? Which ones are the weak sectors? Are any of these actionable? What does the sector rotation tell us about the overall stock market and/or interest rates? These are all question that I ask myself along the way.
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Today I want to focus on the strength that we’re seeing in Utilities and REITs, both on an absolute and relative basis. These guys are known around The Street as income generators, as they pay some of the highest dividend yields of any stock market sector out there.
As it turns out, with the S&P500 down half a percent so far this year, Utilities and REITs are each up over 6%. That’s quite a difference. Now, is it a coincidence that these guys pay the highest dividends and are outperforming by this much so far this year? I doubt it. I don’t believe in coincidences when it comes to Mr. Market.
First, here is a chart of the $XLU – SPDR Utilities Select Index. We’re looking at daily bars putting in a nice symmetrical triangle well-defined by these two converging trendlines. Notice the false breakdown in late-December and early-January that became the catalyst to break this one out to the upside. I love it when that happens:
It looks to me like prices are heading up towards last year’s highs, especially if they can hold above the July & November resistance (shaded here).
The next chart shows the weekly candlesticks for the iShares US Real Estate ETF $IYR, to get some context. You can see that what was once clear resistance throughout 2011, eventually became support in 2012 and 2013. And now prices are ripping.
Here’s a closer look at the recent action in REITs. We can see clean breakouts above both downtrend lines from last year. A thing of beauty no?
Now more importantly look at the relative strength charts for Utilities and REITs. These represent each sector compared to the S&P500. The first one shows Utilities breaking downtrend lines across the board:
And the next one shows REITs doing the exact same thing:
So why do we think there is so much strength, relative and otherwise, into these dividend paying sectors? Could it possibly be that it’s because money managers are looking for places to get yield? Why would they need to do that? Why would they increase their risk for just a little bit more yield when they can get a guaranteed return from the Government not too far from what these guys pay? Could it be that it’s because they think rates are going lower?
You guys know how I feel. I’ve been calling for lower rates for two months. We’re now started to see the stock market react to what I think we’re seeing. Are the big fund managers also now positioning themselves for a lower rate environment?
I’m just presenting the facts. You guys draw your own conclusions. You know how I feel. But what do you think?
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Tags: $IYR $XLU $SPY $TLT $TNX