While the markets are experiencing a typically quiet holiday week, there have been subtle shifts beneath the surface that may be signaling a move into more cautious stocks as investors jockey for proper positioning into the New Year.
The so-called “Trump” rally left many stocks stretched and due a pullback so recent selling in Financials such as Banks and Investment Service stocks is not surprising. What is surprising is the move into other Financial stocks such as Property REITS which are in a group that is generally viewed as defensive given their high yields and general outperformance during periods of weakness in the markets. The strongest REITS now are those that manage Hotels and Industrial properties with Residential REITS also finding buyers.
Another typically defensive area is Utility stocks which have begun creeping up over the past couple of weeks. While these stocks are expected to fare well under a Trump administration because of reduced regulations, the group has only recently picked up – seeing a break above its 50 day moving average on Dec. 8th. This recent move may be an attempt to resume the strong rally these stocks had in the first half of this year when uncertainty reigned and investors sought the safe haven of these high yielding stocks. The group has more work to do before confirming a reversal (see XLU chart below) however as the 50 day moving average is not in an uptrend.
Gold Mining stocks were up 7.8% today with many smaller stocks up even more. The group has been known to be a “flight to safety” play particularly when geo-political or economic uncertainty is heightened. Over the last week, these Gold stocks have been getting attention because they were no longer dropping despite the continued strength in the dollar.
While the broader stock market indices are trading down around 0.5% so far this week, the move into Utility, REIT and Gold Mining stocks is masking the selling in some Financial and Industrial stocks. Those getting hit the hardest are companies that went up with the exuberance of the pro-business election results but do not have the fundamental strength to support their move.
Consumer Staples (XLP) is another defensive sector and while some stocks in this area such as Tobacco and Brewing stocks are rallying, not everything is finding buyers. That said, the sector is finding support at its 50 day moving averages while recently strong sectors appear to be breaking down.
While the longer term uptrend for the markets remains firmly in place, it’s always important to pay attention to possible rotations that may be signaling a shift in short-term sentiment. If we continue to see a move into these defensive groups, we would expect a continued sell-off in the overbought stocks that have brought the indexes close to new highs recently.
Mary Ellen McGonagle
Founder, MEM Investment Research
www.MEMinvestmentResearch.com
Daily Chart of Utility Sector ETF
