foxex: Utilities Drop

Chart Advisor | Focus on the Price

Monday, November 11, 2019

1. Markets Rise as Utility Stocks Drop

2. The Financial Sector's Ball-and-Chain

3. Walmart Performance Outshines Market and Amazon

Market Moves

While the S&P 500 index (SPX), the benchmark for stock investors, paused on its way to new highs, one sector of stocks within that grouping is heading noticeably lower, namely utility stocks. This is usually a bullish indicator for the market at large, but the current circumstances may add a bit more complexity to the picture.

The utility sector, as tracked by State Street's SPDR Utility Sector Index ETF (XLU) began to outpace the markets over the summer when headlines fueled investor nervousness about U.S.-China trade talks. Since the fourth quarter of the year began, however, stocks became resurgent, and investors began to rotate out of the utility sector and back into growth sectors.

Shown below the price chart is a study that tracks the average true range of the S&P 500. When the benchmark index begins to outperform utility stocks and its volatility simultaneously decreases, then historically speaking, stocks have a ninety percent occurrence of increasing over the next quarter. But the factors adding to the decline of the utility sector include fires in California and the potential for rising interest rates. These two items could be clouding the forecast.

The Financial Sector's Ball-and-Chain

Rising interest rates may be a boon to the financial sector, and this is likely one of the reasons the sector has begun to surge higher recently. Interestingly enough one industry luminary, Warren Buffett, has lagged behind the market, and even the financial sector itself. This is a particularly important fact considering how much his firm actually influences the financial sector index performance.

The chart below shows how highly correlated shares for Buffett's company, Berkshire Hathaway (BRK.B), are to the financial sector as tracked by State Street's SPDR Financial Sector Index ETF (XLF). This is largely due to the fact that Berkshire is often among the largest holdings in the fund, but it is also related to the way so many within the industry attempt to emulate the ideas and workings of Buffett himself. Since the fund has lagged behind the sector, however, it is literally holding the sector down from performing better.

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Walmart performance outshines market and Amazon

Walmart (WMT) reports earnings later this week. It will be interesting to see whether the fortunes that have found their way to other retailers such as Target (TGT) and eluded other companies such as Amazon (AMZN), will favor the Arkansas-based company or not. In general it has been an upbeat quarter for retailers, however not all have fared equally.

Walmart's recent strategy of keeping increased inventory in its stores coupled with more aggressive pricing is on review here. The quarterly results should help discover whether customers prefer it over the shiny remodeling accomplished in so many Target stores.

The Bottom Line

Stocks began the week with only a mild pull back from their highs. The low-volatility trading ranges continue even as utility stocks significantly decline. This could be bullish signal for the quarter ahead. The financial sector showed a bullish breakout last week, but Berkshire Hathaway seemed to hold it back a bit. Walmart reports earnings this week and it may give insight into whether there is more than one way to beat online retailers.