This long weekend we had more time to take a step back and think about the things that are currently going on in the market. A big theme that stuck with us was the strength in stocks in the Utilities sector. The question was/is whether this strength in higher dividend paying stocks is evidence that rates are about to fall? Or is there such an overwhelming amount of strength in the stock market, that Utilities are just included in the rally?
Both are acceptable answers and theories, I’d argue. You can find more on that conversation here.
But sometimes I think we just need to pay attention to what’s right in front of us, which in this case is Utilities stocks going higher. So why don’t we just buy utility stocks and not worry about the bond market for a hot minute? The most bullish thing a stock can do is go up. And that’s exactly what’s happening here.
The advantage in this case, I believe, is two-fold. If this indeed is a sign that rates are about to collapse, that would be good for Utility stocks. If this is just an overwhelming amount of buying pressure for stocks in general, that would be good for Utility stocks. If the stock market goes into a correction, lower beta & higher yielding stocks would hold up better on a relative basis than other stocks and sectors. Again, that would be good for Utility stocks. Do you see the common theme here?
This is what the Utilities Sector looks like right now: Just breaking out and on its way to 73 for $XLU:
And remember, Utilities doing well is NOT bad for stocks in general. A rising stock market is consistent with rising prices for Utilities stocks, as you can clearly see here:
And also don’t forget, Utilities have been a massive underperformer for a long time. Some outperformance moving forward would not be out of the question at all. And again, not bearish for stocks. Utilities outperformed from 2004-2007 while the stock market was doing very well:
Look at that bullish momentum divergence on the relative chart. I think a breakout here for Utilities vs S&Ps could really be setting up.
At the individual component level, a lot of stocks in this sector have been in solid uptrends. We’re going to mostly ignoring the ones that haven’t been.
Look at CMS Energy breaking out of this consolidation. Talk about a strong trend here. We want to be long $CMS if it’s above 64 with a target above 80:
I also like Eversource Energy as it breaks through 87. If $ES is above $87, we want to be long with a target above 130
The reason I want to show you a group of ideas in the space, and not just one, is for two reasons. First, we all have different objectives, time horizons and risk tolerance. So there is something here for everyone. But more importantly, in my opinion, so many bullish setups is further evidence of positive breadth and momentum in the sector, that we clearly want to participate in. It’s not just one magic indicator, it’s the whole group collectively progressing.