Surprising Sector Strength

Even though things have been generally bullish over the last few days, some sectors are still in the red compared to where they were two weeks ago. And the sectors that have managed to lead this charge may be a bit of a surprise. The basic materials and technology sectors remain under water, while telecom and transportation stocks have performed quite well. But the two-week performance winner may be downright shocking – utilities. The average utility stock gained 3.71% over the last ten trading sessions, making it the only sector to actually produce positive results in the two-week and one-month timeframes. Wise investors would do well to take that at face value, despite the fact that these names are about as mundane as stocks can be.

Utilities

Over the last six months, the utilities have managed to produce a 10.7% gain. That ranks fourth out of the eleven major sectors, and puts them back in the limelight of possible purchases. It can be tough to be interested in a sector that is largely defensive, but results speak louder than hype. This group has the right momentum, the right chart, and apparently the right reason to be moving higher.

The Dow Jones Utility Index (DJUSUT) has been range-bound for several weeks. However, that may just be the establishment of a base, setting up a move higher. As of right now, the 100 and 200 day moving average lines have been crossed over again. Plus, the sector’s relative strength speaks for itself – it’s beating the rest of the market for a reason. Taking all that data at face value, this group may be one of the better bets right now

A price target of 179 is in place for the Dow Jones Utility Index. The stop on this bullish bias is at 147, or the lower edge of its recent range. The index is currently at 155.75.

Telecom

Although they spent their fair share of time suffering during May’s selloff, the telecom stocks have remained almost as impressive as the utilities have. This sector is up 2.3% over the last ten days, leaving them in second place for that timeframe. Prior to that, this sector was only mediocre – and volatile. But, this past week’s move is a reminder that sometimes volatility is just something that has to be tolerated in the search for bigger gains.

Fundamentally, the strength is justified. The average P/E for the group is 18.8, while average profit margins are 9.2%. The typical return on equity is 12.3%. None of those numbers are impressive to the point of being mind-boggling, but they’re still respectable. And perhaps more importantly, they’re dependable; the telecom companies are probably going to be achieving similar results a few months from now….something not a lot of higher-profile companies can say.

The Dow Jones Telecom Index (DJUSTL) is still in a bigger-picture uptrend, and offers a great deal of reward potential for those who can stomach the up-and-down. We’ve seen several crosses above and below the 200 day average line since 2003, but each move lower was countered with an even higher high within a matter of months. There’s no reason to think that’s going to be different in the near, and not-so-near, future.

The target for the Dow Jones Telecom Index is 168, while the stop level is 130. The index closed at 140.17 yesterday.

Technology

The tech sector continues to lag, as it has for months. In fact, as of yesterday, the average tech stock is exactly where it was six months ago. And there’s nothing on the horizon that’s likely to change that. As such, the industry remains one worth avoiding.

Fundamentally, the picture really isn’t all that grim. The average P/E of 25.85 is fairly typical, as is the margin of 10.6%. The challenge is that – as most everyone knows – this sector trades more on hope and hype than on actual results. And right now, the hype just isn’t getting any buyers enthusiastic enough to actually take the plunge.

And who can blame them? The Dow Jones Technology Sector (DJUSTL) spent most of the last six months moving sideways. And in the instances where it did finally make a decent move higher, an even bigger correction followed. Right now, the index is well under its 200 day moving average line. There are hints that it’s trying to keep moving higher, as it builds on a few bullish days it managed to produce in the last two weeks. But the efforts are on low volume, and on a relative basis, tech stocks would still be in no position to lead.

There’s no set target on this bearish outlook, as the sector may indeed be able to creep higher. It’s just not going to do well if it does; there are better opportunities.

If the Dow Jones Technology Index can manage to get back above the 200 day line at 520, the outlook might change. But with a current reading of 504.59, it may be a while until that’s even a concern. On the flipside, a move under 489 would represent a move to new multi-month lows, and could spark yet another wave of selling.

Disclaimers: This is not intended to be investment advice, nor should it be construed as such. Only a qualified financial professional who is familiar with your personal situation should provide such advice. This commentary is strictly the opinion of the research department of Bluegrass Portfolio Management, LLC, and is not guaranteed to be accurate in terms of forecast, nor the data cited. Specific investment advice is only provided to clients of Bluegrass Portfolio Management, LLC, which may or may not be entirely consistent with this commentary. Some or all of the staff at Bluegrass Portfolio Management, LLC may own positions related to the opinions expressed in this article. Complete position disclosure can be provided by request. See the Contact Us portion of the web site to make such a request.

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