Typically, the time to buy the defensive sectors (bonds, utilities) is over the summer, and during market corrections. Except in extreme case scenarios like 2008/9 – where mass panic will drive all securities down – these sectors can often act as non-correlated, or even negatively correlated assets during market pullbacks. Sometimes investors will call bonds and utilities “Risk off” assets, as opposed to higher beta “Risk on” sectors such as technology and small caps.
I’ve noticed that the US Long Bond – as seen on the TLT chart above, looks to be rebounding from an oversold condition at this time. Bonds typically enter their seasonal period of strength in the summer – so this is obviously not a seasonally influenced move. TLT’s support seems to be coming in at just above the trendline. The US Treasury Bond in particular can be somewhat negatively correlated asset to the stock market during “normal” corrections -as last seen during the stock market’s 20% summer correction of 2011. TLT had a pretty strong run of it during that time period, –as noted on the chart below.
The US utilities sector, as seen on the XLU chart below, is following a similar pattern. The sector ETF is just coming into minor resistance, as noted by the pink line of the chart. Again, this sector is usually best held over the summer. Its unusual to see strength at this time of the year. Then again, both XLU and TLT may be head-faking us with a false rally. That is to be seen as the winter progresses.
I won’t draw any conclusions regarding this potential rally on these sectors just yet. Should TLT in particular continue to show strength prior to the summer – it may be an omen of change for the broader stock markets. That is yet to be seen – but it is a development that is worth watching.
Dumb money confidence getting extreme
BTW—in my last blog I noted the rise in “Dumb Money confidence” to 65%. This has gone further into extremes as Dumb Money Confidence has increased to 83%! According to sentimentrader.com, this has been matched twice before, in mid-January 2004 and late November 2004, both leading to multi-month consolidation phases. Smart Money Confidence is still above 40%, but the spread between the two is extreme enough to have higher confidence in the idea that short-term gains will likely be erased during the next correction, and intermediate-term returns will be subdued at best.
