Say Hello To My Little Friend

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HE’S BACK….

Alright, let’s examine our little friend XLU:SPY. As you’ll recall (you’ve seen this chart about 5 times in the last 3 months) that this is the relative chart where utilities are compared to the Standard and Poor’s 500 index, I use the SPY because it is a liquid etf . When the SPY is strong, the red line goes down and when the XLU is outperforming the broader market, the red line will go up. The black line in the back is the SPY.

Folks have been bailing out of many of the defensive type investments we’ve used for the past two years like XLU, XLP, XLV, and PPA because they have had monster moves and there is belief that the macro-economy is actually rebounding and it is time to get more aggressive. I think momentum has certainly left XLU because they figure that there are better earning opportunities to come in the broader market AND that rising interest rates may tear the face off of utilities that use lots of financing to power their earnings (pun intended).

Interestingly, the “relative performance” of XLU to SPY is now so bad, it might be time for a reversal, which portends a fall in the broader markets and a return to investors seeking the safety of defensive names and low beta investments like corporate bonds and yes, utilities.

ScreenHunter_01 May. 29 10.09

TIME FOR A TURN IN SPY?

As you can tell, I identified a point where the XLU:SPY might find a bottom when the ratio hit a level of .225. This level is where we’ve seen major reversals in the market in Apr/May of 2010 and 2011. When I drew the lines on this chart back in February, it seemed like it was just a bit early, and it certainly turned out to be so. Now, however, perhaps it is right on time. Is this the mother of all reversals? No, I honestly think this market needs a good correction so that it can go higher. If there is such a thing as a healthy correction, this market needs it. – GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug’s Blog – Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

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