The financial press can’t stop talking about it. The S&P 500 has had the longest stretch (468 days) without a 10% correction, the first time this has happened since 1996 (good discussion here). We have been on record that for those looking to play for a pullback to do so by selling weakness (here QQQ/IWM) on rallies as opposed to trying to pick a top in the SPY (here) as there appears to be some “safe haven” characteristics to it as investors have rotated into more defensive large cap shares. As stated in our SPY post from Friday (linked above), we will likely take a shot on the SPY playing for a pullback to to its 200 day moving average just below 1800 on the next failed breakout above 1900, but this is a trade you don’t want to be early on as a breakout and close above 1900 could yield a quick 2-5% rally from those levels.
Taking a look under the hood of the broad market, the ytd out-performance by utilities sticks out like a sore thumb:
In an economy that is far from booming, with a stalled housing recovery, anemic employment growth, weak consumer spending, and despite the Fed’s insistence that rates will remain low for a long time, the graphic above seems about right. After 30% gains last year for the SPX, closing 2013 on all time highs, investors got off the one way train and chose to take more defensive stance, and have been rewarded. But is the rotation over?
I think it is important to note though that the XLU has sold off almost 5% in the last few weeks since making a new 6 year high, closing below its 50 day moving average for the first time since January and establishing a clear break of the trend line that has been in place since the 2014 lows.
While some might view the weakness in utilities as a positive, implying a rotation back towards cyclicals, it’s notable that the broader market ran into trouble last May and June after utilities peaked in May 2013 as well. As a leadership sector so far this year, the weakness in utilities could be a sign of exhaustion rather than rotation. If the S&P 500 index cannot hold above its 50 day moving average around 1860 over the next couple weeks, then the break in utilities might signal that the next selloff in the SPX will be a more correlated selloff that what we have seen in the past few months.