Utilities: Buy now or wait?

 

One of my readers asked me if I thought it was a good idea to play the utilities sector, given their recent outperformance. Utilities have benefitted via rotation into that sector (as well as other defensive sectors) from the higher beta plays of small caps and Nasdaq. I first mentioned this rotation back in early April on this blog: https://www.valuetrend.ca/?p=2856. I also mentioned about a year ago, when the sector was bouncing off of the bottom of its trading range, that utilities were possibly a buy: https://www.valuetrend.ca/?p=2002

Utilities on both sides of the border have been massive outperformers of late. Here’s the chart for the US side, which shows a great trend with supportive moneyflow, although a somewhat overbought momentum profile:

xlu

Canadian utilities moved from the bottom of their trading range (per my March 2013 blog, above), and are now testing final technical resistance at former highs. Here’s the BMO Canadian utilities ETF:

zut

Given the sectors’ strength on both sides of the border, should we be piling into utilities?

While the utilities sector remains technically bullish, there is one factor that potential traders may wish to be aware of. The good folks at www.sentimentrader.com, who I highly recommend as a research service worthy of subscription for any technical analyst or enthusiast, shows us an interesting sentiment indicator laid out against the XLU sector ETF.  The indicator combines options activity, volatility, fund flows, and the price/NAV ratio. You can see on the chart that optimistic sentiment exceeding 80% suggests a pending near termed correction. Currently the indicator reads 84%–a level not seen for a decade, according to sentimentrader.

XLU sentiment

Combining the bullish chart with the overbought sentiment indicator shown, it is probably best for traders to wait for a pullback before buying into the utilities sector.

Upcoming speaking engagements:

Guelph, Ontario: Guelph Public Library Main Branch, 100 Norfolk Street, Guelph, ON, N1H 4J6. Tuesday May 6, 2014, 7PM

Markham:Markham Public Library- Markham Village Library Branch, 6031 Hwy 7 E, Markham, ON L3P 3A7. Thursday May 15, 2014, 7PM

 

3 Comments

  • Hi Keith,

    What do you think of the short term technicals for MX.to (Methanex Corp.). I think it’s seasonally positive in spring but it has had a good run over the last year.

    Ron

    Reply
    • Ron–individual stock info is usually best covered on my BNN appearances, but I have looked at MX recently, so I can give you this: the chart appears to be breaking down from a prior uptrend. I’d be very wary of the stock until it proves that it can bottom out – don’t try to catch the falling knife.

      Reply
  • excellent summary on utilities. Thanks for doing this not only from an ETF investment perspective but also from a technical learning perspective.

    Reply

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