THE CROWDED TRADE

A reader asked me why Staples (XLP-US) AND UTILITES (XLU-US) are in high-stress mode. These are companies that are typically defensive stocks in a selloff, such as we’ve seen recently. Staples and utilities do not necessarily growing that quickly, but they have enormous free cash flows and large net cash positions.  Every investor knows this. Even a five-year-old knows this. Well, OK, a six year old knows for sure. RIGHT NOW, THE MARKET IS DECLINING, YET IT STILL HATES THEM! Why?

Why are staples falling?

A deeper look inside the XLP staples meltdown points to inflation-induced price hikes finally hitting the consumer’s bone. Looking forward – is the inability by these companies to pass on prices the real reason for the intense sell-off in XLP names? YES! The chart below shows us that XLP is now finally feeling the impact of inflation.

 

Why are utilities falling?

Interest rates impact utility companies by increasing their borrowing costs, an important factor for utility companies because of their typically high debt levels. Also, as rates rise on neartermed treasury bonds and GIC type securities, investors often shy away from the similar yields coming out of utility stocks when the same yield is more or less offered in a risk-free security.

The chart below shows us that XLU, like XLP above, is finally feeling the effects of rising rates.

 

Follow the money

The capital coming out of utilities and staples must go somewhere. The market is increasingly convinced that some of the tech bellwethers are -in fact- defensives as well. They are not defensives. This is the same toxic price action we witnessed just before the COVID meltdown – a lot of money is fleeing out of beleaguered sectors into already extremely crowded big Tech. THEN TECH FELL.

The chart below illustrates capital exiting XLU and SXP and going into the tech sector (heavy weighting in QQQ).

 

How long will this discrepancy last?

The chart below is of the NASDAQ QQQ units.

MFI, which is reads moneyflow momentum, is a very reliable overbought/oversold indicator for long termed movements. It topped and rounded over this summer. My horizontal line on that indicator (bottom pane) suggests that if the correction on QQQ is average, we are nearly done. However, MACD, which measures price momentum, is looking like it has room to go on the downside. The neartermed trend is bearish (lower highs and lows).

XLU looks like poo

OK, that was a childish heading. But it rhymes, and its true. Its oversold, and may see a neartermed pop. But the chart shows a big breakdown. I’m just looking for a neartermed move.

 

Staples look more stable

That didn’t rhyme, but it still works for a title.

XLP is testing support. I think it will hold. Its oversold. Check the MACD histogram–deeply under the “0” line. Seasonality is favorable to this sector to end of October and early November. Look for a bounce, IMO. We do hold a position in this ETF.

 

Conclusion

Not sure I’d buy XLU right now. XLP might be a reasonable neartermed trade. As for the QQQ units – hard to get too bullish on the chart above.

Keith on BNN tomorrow

I’m on Bloomberg BNN MarketCall tomorrow… Tuesday October 10th at noon. Its a call-in show, and I’m happy to answer your questions on individual stocks, or discuss Technical Analysis techniques.

I do appreciate it if you mention you read my blog when you call in. My shows have been getting above average call-in volumes, so you should make a point of calling near the beginning of the show to get priority.

Note:  Calls are prioritized over emails.

CALL TOLL-FREE 1-855-326-6266 during the show
Find us on Twitter:
@marketcall
Specify questions are for me…Email:[email protected]

2 Comments

  • Keith This blog may strike home for a lot of your readers because just as you run an income fund and an aggressive fund I suspect many readers have a good percentage of their investment funds in dividend paying stocks and those that attempt to emulate your trading style (myself included) have the another chunk they use for shorter term trades.
    If this is true it would be of interest to know what percentages your users are at. I am 55 dividend 45 trade with available cash in both as you currently suggest.
    Question Do you trade in the income fund in the same short/ mid term style or are most names just held for the dividend and you ride out the ups and downs over several years?

    Reply
    • David–our income platform is relatively passive when compared to our equity platforms. Big technical support breakdowns will inspire a sell, but we don’t look at technical resistance as sell targets nearly so much as with the equity platforms. We do replace names sometimes with better quality or outlook, but the idea is to just collect the dividends in that account over the long term. One other aspect of that platform is to adjust equity to fixed income ratio. For example, we’ve been leaning more towards fixed income now, given yields. We also adjust duration (term) on bonds.
      As far as client ratios between them – its entirely based on their goals. We do investment plans to help them achieve their goals, and if immediate need for income isn’t an issue, they get much smaller, or no, income platform exposure. We do have a separate cash-yield strategy that we do for clients who need liquidity as part of their plan.
      Craig is the lead PM on that platform.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Never miss another blog post!

Get the SmartBounce blog posts delivered directly to your inbox.

Topics

Topics

Recent Posts

SECTOR EARNINGS UPGRADES

Long bond setup

NAZ futures

Opportunity in the fall, gold, and why risk-on matters

spx

Just asking

SPX va 40 month SMA

An oil trading opportunity?

nyse AD

Bear-o-meter – Investment Analysis – July 2024 – Reads a 3

TOBINS Q

Contest winners and an alarming market indicator

Keith's On Demand Technical Analysis course is now available online

Scroll to Top