An oversold bounce in the U.S. S&P Utilities could occur, but that would represent a selling opportunity given overvaluation and the bearish trend in our cyclical indicator for the sector.
O ur Cyclical Utilities Indicator has suffered a relapse, and is testing a new cyclical low. Each of the indicator’s components is weak, but the most pronounced declines are in consumer spending on electricity, relative utility output growth and steep losses in the bond-to-stock ratio. Some relief to electricity output may be in the offing if manufacturing activity rebounds, but high wage costs and increased capacity imply that it will take some time to generate better profitability.
Importantly, value remains poor. Yields on competing investments such as Treasury bonds are rising, further reducing the incentive for investors to allocate funds to the staid utilities group.
Finally, our Technical Indicator remains stuck deep in negative territory, underscoring that the path of least resistance remains lower.
Bottom Line: Continue to underweight S&P Utilities.