As we approach the end of the year, the tech sector seems to be struggling to keep pace with the broader market. Growth certainly isn’t dead, but there’s a noticeable rotation happening as Treasury yields fall and utility stocks gain relative strength.
Here’s where things get interesting. If you’ve followed me for a while, you know I’m big on intermarket analysis as a means of identifying what various relative movements of asset classes and sectors are signaling. I think we can all agree that utility stocks are the quintessential “defensive” sector while technology is the most offensive. When I look at the price ratio of utility stocks to tech stocks, that sure looks like a bottom.
Note that this sideways relative movement with slight pickup in utility stocks happened THIS month, which could potentially be the best-performing month for the S&P 500 this year. And yet tech seems to be showing signs of giving up.
While it’s too early to declare a sentiment shift in this sector, this furthers my belief that we are not out of the woods yet.
The Bottom Line: Why Utility Stocks Matter
Some reading this may not understand why the utilities sector is so significant.
Utilities, a sector comprised of companies like electric, gas, and water firms, form a crucial part of public service infrastructure. These companies are heavily regulated and often held as long-term investments, primarily because they offer reliable dividends and less volatility. A surge in the strength of utility stocks can act as a harbinger of increased volatility and extreme market movement in the short term (something I’ve shown in numerous studies going back to 1926). This is because investors often retreat to the safety of utility stocks during periods of economic uncertainty.
As such, strong demand for these stocks can sometimes indicate market turbulence ahead and be a warning of risk-off dynamics to come.
I’m not trying to be overly bearish here, but when I see the strength in gold and the slow creep up in utility stocks, I can’t help but wonder if there’s a rug pull out there for equities. The year is not over, and it doesn’t seem impossible for there to still be fireworks just as everyone assumes Santa Claus is coming to town.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
