Wednesday, 29 May 2013

Utilities Falling off its Cliff

As I mentioned before, this rally has been unusual in how strong the defensives such as the Utilities sector has been.  Normally they underperform going into the rally, not leading it.

Likely the search for reliable safe yield has been pushing demand for them.  However, with the suggestion that QE may finally start tapering off, as well as the market just being plain overbought, looks like the Utilities are starting to come off its highs, and in a big way.

As seen below, XLU has just absolutely plummeted in the last 5 days especially, has moved past its 50 DMA and is close to contesting its 200 DMA.  This really isn't that surprising as by many metrics, the defensives were incredibly overvalued.  Their current yield before the drop was a very uninspiring 3.5%, very low considering you can get yields of 3.3% from DVY and 5.8% from PFF.

In general however, the market has definitely taken a short breather this week, all due to the Fed announcements.  Is this the start of a down cycle or just another pause?  Interestingly, there's been a rocky spot in the rally every month and a half, last seem in mid may and in late Feb before that.  Those only lasted 1 week before the market continued its climb.  We're halfway thru that same cycle, so it'll be an interesting indicator of the sustainability of this market.  My feeling is that market is overdue for a consolidation at minimum and likely a correction.  However, I been expecting one for a couple months now so...take that as you will.  I'll be curious to see what sentiment data is like, haven't seen any charts on that lately.

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