Tuesday, December 30, 2014

Is the utility stock boom a bad sign?

I was asked by a subscriber about all the new 52-week highs among the utility stocks, specifically whether it was a bad sign for the broad market outlook.  Here's my answer:

Utilities tend to trade in line with Treasury prices.  As such, they can be considered almost a quasi-bond.  Leadership in the Dow Jones Utility Average (DJUA) is normally a good confirming/leading signal for the broad market.  The only exception to this rule I can think of was in the weeks immediately preceding the 2008 credit crisis when the DJUA gave a misleading signal -- a new high while the S&P 500 made a lower high.  Aside from this exception, in most cases when the DJUA shows leadership the rest of the market usually follows.  

I would also add that the intense demand for utilities among investors right now is a reflection of the demand for relative safety in an environment where many investors don't feel comfortable with the situation developing in Europe and Asia.  As such, you could almost call the utility bull market a safe haven play.  I'd much rather see utilities on the new highs list than a more speculative asset class since the latter would indicate a potential bubble forming.  I see no danger of that right now.