While the broad stock market has been getting hammered, the utility sector hit a 52-week high this week – and achieved a significant relative breakout.
Our firm’s philosophy when it comes to investment selection, i.e., where to invest, is to concentrate in the strongest performing areas of the market. We refer to this as relative strength. Typically, this means the sectors that are rising more than the rest, especially on a risk-adjusted basis. Occasionally, though – in a market correction or bear market – it can mean the sectors that just aren’t losing ground, or are losing the least. This is the case currently with the utility sector. For, while most areas of the market are off to a historically weak start, utilities are up 8% for 2016, as measured by the Dow Jones Utility Average (DJU). Furthermore, while the DJU is up a mere 1.7% over the past 52 weeks, it is nevertheless at a 52-week high.
Additionally, as the chart indicates, the utility sector has broken out of a well defined downtrend on a relative basis versus the S&P 500. While there is no guarantee, this does suggest that, over the longer-term, the utility sector could be in the early staged of out-performance versus the market. And based on past occurrences when we have witnessed relative breakouts of some variation (e.g., 2000, 2007), this is not necessarily a positive development for stocks overall.
It remains to be seen whether similarly challenging times will materialize for the broader market versus utilities over the longer-term, but that trend certainly is in effect at the moment.
“diffuse station” photo by Hope Abrams.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.