Perhaps it was inevitable after the brutal beating the sector has endured, but the State Street Utilities Select Sector SPDR ETF (XLU) led all sectors higher last week, rising 4%.
Technology shares fell slightly – the State Street Technology Select Sector SPDR ETF (XLK) was down a modest 0.5% – but overall, it was a great week in the market.
Nine out of 11 sectors were positive, and eight of them outperformed the S&P 500 Index.
Let’s talk about that…
I’ve been saying all year that as goes the tech sector, so goes the S&P 500.
With close to half of the index in tech or tech-adjacent stocks, it’s extremely difficult for the market to sustain a rally without the tech sector participating.
The S&P 500 was indeed higher last week, rising 1.2%. But losses in tech and flat performance in the State Street Communications Select Sector SPDR ETF (XLC) – which includes “Magnificent Seven” heavyweights Alphabet (GOOGL) and Meta Platforms (META) – led it to massively underperform most industrial sectors.
So, how do we interpret all of this?
Let’s see what my system says.
Have Utilities Hit Bottom?
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.
Well, after the drubbing utilities have taken over the past few weeks, virtually none of them were anywhere near their 52-week highs, so I loosened that criteria.
Here’s what I came up with:
Notice a distinct lack of green here?
Not a single stock on this list rates as “Bullish” on my system.
In fact, eight out of the nine rate as “Bearish.” And the one “Neutral” stock – Pinnacle West Capital Corp (PNW) – still rates below a 50.
All of this suggests that the recent strength in utilities is a “dead-cat bounce” driven mostly by short-sellers covering their positions.
The sector rates terribly on my Green Zone Power Ratings, and the main reason that the sector has been trending lower for weeks – the rout in the bond market – remains in place.
Until bond yields retreat from their elevated levels, we’re not likely to see a sustainable rally in utilities.
The sector gets hit by rising yields in two ways. To start, utilities are extremely capital-intensive. They tend to borrow heavily to fund ongoing capital expenditures, and that’s a lot more expensive today.
Every extra dollar spent on interest is a dollar not flowing through to earnings.
Apart from that, utility stocks themselves are often used by income investors as bond substitutes. When bond yields rise, bond prices fall… as do the prices of bond substitutes like utilities.
If the economy were to hit the skids, we’d likely see utilities do well as investors rotated to more defensive sectors.
But barring that scenario, utilities should be avoided for now.
Buying the Dip in Tech?
Tech stocks as a sector dipped half a percent last week. Can we really call this a “dip”?
Perhaps “a short pause to catch its breath” would be more accurate. After all, XLK is up a blistering 38% this year and 6% in just the past month.
Let’s see what my system says.
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.
Well, good luck finding a tech stock close to its 52-week low!
After the run we’ve seen this year, that’s just about impossible. So, I loosened the criteria to include all stocks in the tech sector.
My system is telling us to steer clear of this particular group, at least with long-term capital to deploy.
Nvidia (NVDA) rates the highest, on the “bullish side of Neutral.” But not a single stock on the list crosses the threshold to be rated as “Bullish.”
Let’s talk about Nvidia.
Last month, my Infinite Momentum system added the world’s leading chipmaker to my Tech Titans portfolio. It rated it as one of the 10 Nasdaq 100 stocks most likely to lead the market higher over the following four weeks.
So… what gives?
How is it that Nvidia is good enough to make the top 10 for Infinite Momentum yet rates a middling “Neutral” on my Green Zone system?
It comes down to timing.
My time horizon in Infinite Momentum is exactly four weeks. Whatever happens a day after that isn’t our concern. By then, I will have re-run the model and created a new list for the following four weeks.
Meanwhile, my Green Zone Power Ratings are designed for long-term, multi-year investing. It’s not designed to tell you what will outperform over the next couple weeks.
So, what do we make of this?
My systems are telling us that Nvidia is statistically likely to outperform for at least another few weeks. But after that, it’s priced to more or less track the broader market’s return.
My system is constantly digesting new data as it comes in.
But for now, it’s telling us the best course of action is to view Nvidia – and most of the rest of the Mag 7 – as short-term trades.
To good profits,
Adam O’Dell
Editor, What My System Says Today
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