What does this surge in Utilities mean for the Stock market?

HEADS UP: I’ll be making an appearance on CNBC tomorrow (Friday) morning at 6:10 am EST.

Equities have extended gains and have now come within striking distance of late March peaks.   SPX has nearly recaptured all of the period of weakness from late March into April, and likely will test and break out above resistance as US Dollar and US Treasury yields start to weaken. The uptick in Financials, Materials, and Industrials are constructive factors towards helping the market begin to show more broad-based strength.   Additionally, Small and Mid-cap styles have come back to life over the last week and this recovery is also important despite it being in its infancy.  Overall, I expect that SPX has little resistance ahead of late March highs at 5264.85 and eventually can exceed this as the rally grows stronger into June with targets near 5400.

US Equities are starting to look much more appealing again on a broad-based nature given the comeback of several former groups which had been hard hit during the selloff this past March.  Materials, Financials and Industrials have started to “kick into gear” while Healthcare is slowly trying to bottom out.  Utilities has surged to show broad outperformance over all other sectors on a 1 and 3-month basis.  However, this likely does not pose a problem for US Equities, as interest rates begin to fall.

While Technology has lagged performance in the last month, there have been some meaningful and positive developments in “Tech” concerning the breakout in the Semis space along with AAPL also achieving its own breakout.

Emerging markets have also begun to show above-average strength, and a push back into Growth stocks has helped this Style look attractive despite a strong push into Technology.  I’ll forgo discussion of SPX on a short-term basis to discuss the recent surge in Utilities.

What does Utilities outperformance mean for the market?

Normally, one would view an uptick in Utilities as a possible warning sign, as the bear market of 2022 was directly preceded by a big lift in Defensive issues throughout the latter part of 2021.

However, not surprisingly, given lack of strong relative strength in other defensive sectors like REITS and/or Consumer Staples, I don’t feel this recent uptick in strength warrants much concern.

While Utilities as a sector has outperformed all other sectors handily over the past 1 and 3-month periods, much of this relative strength is due to the demand for power centers to support the AI boom.

As many investors are aware, forecasts of these datacenters’ power consumption needs have sparked some life into the Independent power producers (IPP’s) like Constellation Energy (CEG 0.70% ) and Vistra (VST) which have swamped performance in other Utilities this year rising over 80% year-to-date.

However, other Utilities like NRG -1.28% , NEE -0.26% , PEG -0.39%  have also risen more than 20% and these handful of Utilities listed above have led performance of all Utilities within the 32 member XLU since the beginning of the year.

As charts of XLU -0.24%  show below, the SPDR Select Utilities ETF, the last two weeks of gains have jumpstarted some parabolic performance for this sector.  XLU jumped about 10% quickly in the last two weeks from $66 to over $61 and looks set to close near the highs of its weekly range.

In the short run, this rally has grown a bit overbought, in my view.  However, as has been discussed in these reports in the past, overbought conditions don’t warrant selling when the momentum that’s accompanying and driving the overbought conditions remains very much in force.

Technically speaking, I expect XLU to likely push up to $75-$78 without too much trouble before facing a more material area of resistance.

SPDR Select Utilities ETF

Overall, this looks like a very strong move in the near-term, technically speaking.  However, I feel that upside should be capped near the prior peaks from late 2022.  Furthermore, even reaching this level for XLU might take some time given recent overbought conditions likely needing to be alleviated.

Bottom line, Utilities are outperforming in the short run.  However, I don’t sense that this will become an intermediate-term area which demands focus until/unless relative charts start to show the same degree of outperformance.

Utilities vs. S&P showing minor breakout only but larger challenges remain

As might be expected, it’s tough to extrapolate recent strength in Utilities towards expecting an intermediate-term rally might develop.

A one-year downtrend of the relationship between Equal-weighted Utilities and Equal-weighted S&P 500 was achieved last month which has helped Utilities begin to trade sharply higher.

As can be seen on this weekly relative chart of RSPU -0.33%  vs. RSP 0.08% , this move is a short-term positive but hasn’t exceeded the larger downtrend.

The ability to break intermediate-term trends would be necessary to drive more interest into Utilities being a longer-term area of focus.  At present, while it’s difficult to fade this short-term gain it doesn’t look likely to extend to achieve any sort of larger breakout.

S&P 500 Equal Weight Utilities ETF / S&P 500 Equal Weight ETF

Natural Gas looks to have begun a short-term period of upside acceleration

Natural Gas (NG 1.14% _F) has suddenly come back to life as Thursday’s rally back over $2.30 has helped to kick off a new short-term uptrend for “Natty”.

This appears like a short-term rally only but might last throughout May before dipping as June gets underway. However, I expect this likely has roughly 3-5 weeks of strong gains, technically speaking.

Given my thought of Crude oil starting to turn higher, Natural Gas very well could bounce in this same cycle and move up throughout the month of May.

Generic Natural Gas Futures charts show $3.00 as being an important technical level, but the act of getting above there would lead to a much stronger move.  ETF’s which investors normally consider which correlate strongly with Natural Gas are UNG, the US Natural Gas Fund LP.  While some investors might consider the speculative, leveraged BOIL 5.34%  as an avenue for investment I highly discourage this alternative given its leverage and composition.

Natural Gas Futures

Natural gas cycles look positive until the month of June

Cycles involving the 236-day cycle, 78-day and 125-day all combined in a composite have shown some interesting confluence with former peaks and troughs in Natural gas over the last decade.

The pink line shown below (amplitude) suggests that Natural gas should be moving higher into June before starting to turn lower.   For those new to these charts by Foundation for the Study of Cycles, the magnitude of the move is of lesser concern, and investors should be concerned with the turning points only.

However, I feel that Thursday’s gains likely have kicked off a period of gains for Natural gas, so I’ll be tracking this in the weeks ahead and giving some comments as this move progresses.

Natural Gas (Cycle Composite)