Crosscurrents in utilities

Key points

• Utility stocks have enjoyed a sharp advance following a period of exceptionally strong insider buying
• However, an unfavorable sentiment warning sign has now flashed
• The message may be less "sell everything now" and more "adjust your expectations and pay close attention to price action"

Utilities rally after insiders load up

The chart below shows that the Utilities Select SPDR ETF (XLU) had spent roughly six years in a trading range before launching a strong rally in recent months. 

Does this rally have legs? It could. Several favorable signs began to flash last fall before the final decline to the October 2023 low. Likewise, utility industry corporate insiders went on a significant buying spree earlier this year. This type of activity tends to portend favorable industry action for one to three years. 

But nothing is ever easy in the markets. The historical results following similar Optix performance suggest something completely different.

...but the bulls rushing in may be a signal to lower expectations

The chart below highlights with a red dot all dates when our XLU Optix indicator crossed above 96. This suggests rampant bullishness among investors towards the utility sector.

Does this portend that the party is over and that all utility stocks should be sold? Not necessarily. But it does suggest that the rally may have gotten ahead of itself and that investors would do well to adjust their expectations in the months ahead.

The table below displays a summary of XLU performance for ALL trading days since the inception of XLU trading in 2000. Note the positive median returns and Win Rates of 55% and higher for all time frames.

Compare that to the numbers below, which summarize XLU's performance following the red dot days highlighted in the chart above. 

Win Rates are lower across the board, Median Returns are negative through six months, and the 3-month Win Rate is just 21%. These results suggest that current utility investors prepare for some choppiness in the months ahead and that a better buying opportunity may await those looking to enter the utility sector.

What the research tells us…

Will the insiders be correct as we witness a continued uptrend in utilities? Or have overly optimistic traders thrown a monkey wrench into the works? Given the diametrically opposed outlooks of the indicators above, paying close attention to price action is the best advice.