Are investors driving the utilities sector into an overbought condition?
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ARE INVESTORS DRIVING THE UTILITIES SECTOR INTO AN OVERBOUGHT CONDITION?
The S&P 500 utilities sector .SPLRCU has been one of the best performing sectors in recent months, as investors pile into so-called defensive trade amid a slowing jobs market, a shift in the Federal Reserve's interest rate policy and anticipated energy demands from artificial intelligence computing.
However, several indicators are now signaling the utilities sector is overbought and that investors have overextended themselves, according to an analysis by SentimenTrader's Dean Christians.
First, almost all utility sector stocks are hovering near market highs, as the percentage of the group's stocks trading within 5% of a 252-day high have reached 96%. The last time that
such a threshold was surpassed was in 2016.
Whenever the percentage of utility sector stocks trading within a 252-day high surpassed 95%, the extreme overbought condition was likely to mark the end of a favorable period for the utility sector, according to SentimenTrader.
"Over the following year, the group exhibited unfavorable returns and win rates. The situation was especially dire in the near term, with the sector declining 89% of the time in the subsequent month," Christians said.
Secondly, the utilities sector and other defensive sectors usually outperform during market selloffs. But it is uncommon for them to lead a broad market rally as they have done in the past three months.
The percentage of S&P 500 utilities sector stocks outperforming the benchmark S&P 500 over one and three months surpassed 90% and 95%, respectively, as the sector finished within 0.5% of a 3-year high, according to SentimenTrader. That was the 14th time the utilities sector has performed in such way since 1960.
Data shows that the utilities sector tended to decline over the subsequent three months, with several time frames exhibiting significantly worse returns than random returns over the study period, according to SentimenTrader.
"Like the overbought signal, the overall market saw solid performance, suggesting that utilities' recent outperformance may have been influenced by a macro factor that benefited most stocks, such as falling rates," Christians said.
(Chibuike Oguh)
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EUROPEAN FUTURES EASE, TESCO UPS PROFIT FORECAST - CLICK HERE
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