If it looks like a bond and quacks like a bond… chances are good it’s taken a beating lately.
The worst-performing sector last week, for the second week running, was utilities. The State Street Utilities Select SPDR ETF (XLU) was down another 3.2% following its 3% drubbing the previous week.
Meanwhile, the “Magnificent Seven” roared back to life. The two strongest-performing sectors last week were the two most heavily dominated by the seven megacaps: technology and communications.
The State Street Technology Select SPDR ETF (XLK) was up a solid 3.6%, followed by the State Street Communications Select SPDR ETF (XLC) at 2.3%.
Over the summer, sentiment toward tech had turned a little too bearish a little too quickly. A strong string of earnings releases has eased those fears for now, allowing the major tech names to snap back strongly.
Might we be due for a similar rerating of bonds? Could it be that sentiment toward yield-sensitive investments also got a little too bearish a little too fast… and that a bounce in bond substitutes like utilities is inevitable?
Maybe.
We’ll cover that in a moment.
But first, let’s see what my system has to say about the tech rally.
The Mag 7 Live!
As I do every week, I ran my customary screen of the biggest movers in the sector that were still within 10% of their 52-week highs. The idea is to look for solid, market-leading stocks that are getting stronger.
Here’s what I came up with:
Two of the top 10 performers were Mag 7 stocks – Meta Platforms (META) and Microsoft (MSFT). (Meta is technically in the communications sector, but I allowed my screener to use a broader definition of “tech” for our purposes today.)
Meta’s performance was particularly impressive for a company of that size. This isn’t some speculative small-cap we’re talking about.
A 13% move in a stock Meta’s size represents $200 billion in market value. The weekly move alone would be large enough to make it a top 55 company by market cap!
It’s no secret what has Wall Street excited.
As I discussed last week, Meta’s new AI agent is looking to be a smash hit. And this development makes Meta the first AI company to bring a functioning agent to the mass consumer market.
But more importantly, it breathed new life into a trade that had started to look long in the tooth.
The AI trade still has a long runway in front of it.
Still, my system is still telling us to be careful here. Meta rates as “Bearish” on its Green Zone Power Ratings, and Microsoft rates as “Neutral.”
The most obvious “Bullish” rated AI stock on the list is chipmaker Advanced Micro Devices (AMD). Apart from an overall rating of “Bullish,” AMD rates extremely well on momentum, quality and growth, with factor ratings of 92, 94 and 98, respectively.
The stock isn’t cheap by any stretch of the imagination.
But it’s growing like a weed and practically printing money.
Is the Damage Done in Utilities?
As I noted last week, utilities have a reputation for being particularly sensitive to interest rates.
Many retirees use them the same way they use bonds: as a consistent source of income.
When bond yields rise, bond prices fall… as do the prices of bond substitutes like utilities.
Bonds have gotten absolutely obliterated this year.
The yield on the 30-year Treasury is up almost a full percent since its lows at the onset of the Iran war. To give you an idea of what a move like that does to bond prices, the iShares 20+ Year Treasury Bond ETF (TLT) is down over 13% in that same period.
The move is even more extreme in the utilities sector. XLU is down more than 17% from its late February highs.
After a move like that, could it be that bearishness has reached an unsustainable extreme?
Maybe.
It’s entirely possible that any progress in ending the Iran war could lead to a major bounce in bonds and bond substitutes like utilities.
Let’s see what my system has to say about that.
I ran my customary screen of the sector’s biggest losers for the week that are still trading within 10% of their 52-week lows. The idea is to find beaten-down gems that look poised to recover.
Here’s what I found:
Unfortunately, there’s not much room for debate here. My system is telling us in no uncertain terms to stay away from utilities.
Every stock on the list rates as “Bearish” or “Neutral” on my Green Zone Power Ratings. Not a single one rates as “Bullish.”
Trying to pick a bottom here is like trying to catch the proverbial falling knife. Yes, yields are relatively high by the standards of the past 20 years. But they’re not high enough to justify fighting the trend.
At least not yet.
To good profits,
Adam O’Dell
Editor, What My System Says Today
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