Vinny: "The UTES are back!!"
Judge: "Did you just say UTES??"
Vinny: "Oh, excuse me, your Honor. Utilities."
Yes, utilities are back with a vengeance, all right, as the year that couldn't get any stranger drags on, leaving investors underperforming and shaking their heads in disgust and regret.
This market remake of the popular dialogue from the movie "My Cousin Vinny" is certainly apropos at a time when global bond yields are plummeting and the hunt for yield is on. The World Government bond yield index hit a record low of 0.7539% on Wednesday, based on the Citigroup index comprising 23 countries. Negative interest rates amid plummeting long bond yields on growth concerns might not seem like the right environment for rate hikes, but they're certainly advantageous to yield-hungry investors who can capture yield through the utilities.
Performance-wise, the utilities through June 9 had outperformed all other S&P 500 Global Industry Classification Standard (GICS) Level 1 groups year to date, with returns of 16.27% swamping the S&P's 3.5%. Utilities are leaders on a 12-month basis as well, thumping the next best sector (consumer staples) by more than 600 basis points, at 19.66%. Who would have thought this group could outperform when the S&P lies within 1% of all-time highs?
Technically speaking, this group remains one of the best technical groups to own right now, and looks to continue higher in the weeks and months ahead. Daily Utilities Select Sector SPDR Fund (XLU) charts show prices having just broken back out to new high territory in the last week following a nearly 18-month base, which many technicians, including myself, would label a cup-and-handle pattern.
Momentum is not all that overbought given the three-month consolidation near the highs, and given this week's technical breakout above $50 in XLU, higher prices are likely, targeting $53.50 to $54.00.
Many might be loath to touch the utilities given concerns about high valuation or interest rate normalization just beginning, and some investors feel that yields on the long bond should go nowhere but higher. Yet precisely the opposite is happening, and at least technically, it looks like another few months of outperformance and above-average relative strength is likely out of this group.
The second chart highlights the relative relationship of XLU versus the S&P 500, which also has just broken out, exceeding an intermediate-term relative downtrend that's been in place since February. So despite a good likelihood of stocks moving back to new high territory, we're faced with a market where defensive groups look quite good, with stocks on the cusp of all-time highs. (And you thought the political scene was a little strange this year?)
For now, despite the ongoing market resiliency, utilities look like a group to consider owning, if not for yield reasons then for safety reasons at a time when uncertainty is at the forefront during the six-month period for stocks that's historically sub-par -- that is, between May and October. An added bonus, of course, is that technically the group remains attractive and might continue to offer above-average outperformance in the months ahead given the sharp global downtrend in place for bond yields.
Stocks to consider technically include PG&E (PEG), WEC Energy Group (WEC), CMS Energy (CMS), NiSource (NI) and NRG Energy (NRG). The latter has the unusual honor of going from worst to first -- it underperformed all other 29 companies that make up the XLU over the last 12 months with a negative 30.47% return, but has outperformed all other 29 XLU constituent members on a year-to-date basis with returns of 40.95%. (And you thought the UTES were dull and boring?)