Flipping the switch

  • High-voltage utilities recently surrendered YTD leadership to broad market
  • Sector positioned to benefit from year-end rotation?
  • Certain stocks have retreated to, or fallen through, key support

Just about two weeks ago, electricity provider Southern (SO) looked like it was on the cusp of an upside breakout, having consolidated for more than a month after hitting an all-time high of $62.36 on September 24:

Southern (SO), 12/31/18–10/24/19. Southern (SO) price chart. Breakout watch: Poised to extend rally.

Source: Power E*TRADE

At that point the stock was up a not-very-utility-like 40% on the year, more than double the S&P 500’s (SPX) gain.

Spoiler alert: Southern did break out of the upside of its trading range.

But that’s not the end of the story by a long shot.   

The chart below shows Southern’s rally was part of what has been a banner year for utilities (represented here by the Dow Jones Utility Average, DJUTL), which kept pace with the SPX even as the broad market charged to record highs in late-July, but then put the SPX in the rear-view mirror for the next two months. It’s only been in the past few days that the SPX has climbed back above the DJUTL for the year, as the latter broke down below the support of its October lows (dashed line):

Dow Jones Utility Average (DJUTL) and S&P 500 (SPX), 1/2/19–11/7/19. Utilities outpaced market for much of 2019.

Source: Power E*TRADE

The recent change in fortune for utilities is not necessarily mysterious, considering that after three months of repeatedly flirting with and retreating from new record highs, the broad market finally punched a hole through the clouds in late October, and was continuing to gain altitude as of yesterday.

Utility stocks are a defensive sector—maybe the classic defensive sector—so what may be more unusual is the fact that they outperformed an uptrending broad market for so much of the year. With the market now experiencing rather than anticipating new highs—as we get deeper into what is historically the most bullish period of the year—some rotation out of utilities may, as they say, “make sense.”

Now let’s return to SO. The chart below shows what happened after the stock was knocking on the door of its trading–range highs on October 24:

Southern (SO), 7/26/19–11/7/19. Southern (SO) price chart. Bull trap?

Source: Power E*TRADE

After swinging back toward the lower boundary of the consolidation, SO broke out to the upside after beating its earnings numbers on October 30. It notched two more record intraday highs before reversing intraday on November 1 and, over the past four days, returning to the bottom of the range. (In a way, its position is similar to DJUTL’s four days ago, right before the utility gauge broke below support.)

There’s a name for this type of price action: “bull trap.” It refers to what can happen when an uptrending market enters a consolidation, breaks out to the upside—suggesting the bulls are ready to begin a new leg of the rally—only to quickly reverse to the downside, potentially “trapping” the bulls who bought the breakout and, if selling pressure continues, forcing them to sell their positions at a loss, fueling downside momentum.

Right now, short-term traders could be looking for stocks like SO to give back more of their rallies if they don’t hold their support levels. Utility stocks will likely always jump to the head of the line during times of broad–market stress, but there are times when every sector switches from leading the parade to watching it go by.

Market Mover Update: Amid more positive news from the trade-war trenches, Schlumberger (SLB) rallied more than 1% yesterday as crude oil futures extended their recent winning streak (see “Untapped potential?”).

Today’s numbers (all times ET): Consumer Sentiment (10 a.m.), Wholesale Trade (10 a.m.), Baker-Hughes oil rig count (1 p.m.).

Today’s earnings include: US Concrete (USCR).


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