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Summary

  • Mr. Market’s change in mood from manic last year to depressive this year is mirrored by the behaviors of the Select Sector SPDRs partitioning the S&P 500 into nine pieces.
  • The Utilities ETF was the worst performer among the Select Sector SPDRs in 2013, when it advanced to an adjusted $37.66 from $33.31, a gain of $4.35, or 13.06 percent.
  • However, the Utilities ETF was the best performer between Jan. 1 and April 17 in 2014, when it climbed to $42.30 from $37.66, an increase of $4.64, or 12.32 percent.
  • Headwind: Analysis of the Utilities ETF’s seasonality indicates the SPDR’s highest mean and median monthly returns came in April during the first 15 full years of its existence.
  • Tailwind: Earnings-per-share estimates published by S&P Dow Jones Indices appear more reasonable for the utilities sector than they do for the S&P 500’s other sectors.

Neither an investor in the Utilities Select Sector SPDR exchange-traded fund (NYSEARCA:XLU) nor a trader of it, I observe the ETF's behavior by multiple metrics as religiously as do any of its adherents in the context of my Daily Market Seismometer, which alerts me to tremors in the financial markets in advance of every trading session.

Approaching the equity market in this systemic way, I was able to detect Mr. Market's psychological shift from manic last year to depressive this year early in the long-term process of sector rotation, as reported in "Sector SPDRs Behavior In January Indicates Change In Mood, 2013 Vs. 2014."

I believe the low-beta Utilities ETF is key to any analysis of stock-market sentiment based on the comparative performances of the nine Select Sector SPDRs. If the Utilities ETF ranks either at or close to No. 1 in relative returns during a given period, then I think market participants are generally in risk-off mode; if the Utilities ETF ranks either at or close to No. 9 in relative returns over a given period, then I think market participants are generally in risk-on mode.

Figure 1: XLU No. 1 Among Select Sector SPDR ETFs This Year

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted daily share-price data at Yahoo Finance.

Assessing the Select Sector SPDRs on an adjusted basis this year, the Utilities ETF has behaved best, rising to $42.30 from $37.66, an advance of $4.64, or 12.32 percent, and the Consumer Discretionary ETF has behaved worst, falling to $63.77 from $66.62, a decline of -$2.85, or -4.28 percent (Figure 1).

Bearing in mind the SPDR S&P 500 ETF (NYSEARCA:SPY) in 2014 has climbed to $186.39 from $183.88, a gain of $2.51, or 1.37 percent, the relative overperformance of the low-beta sector SPDRs and the relative underperformance of the high-beta sector SPDRs appears especially important with the large-capitalization area of the equity market soon to enter its historically weakest period of the year, as described in "SPY Seasonality: Share Price Cools Down While U.S. Air Temperature Heats Up."

As applied to the Select Sector SPDRs, beta is a gauge of the volatility of each fund in comparison to the market as a whole. The lowest-beta sector SPDRs are Utilities, 0.23; Consumer Staples (NYSEARCA:XLP), 0.50; and Health Care (NYSEARCA:XLV), 0.76. The intermediate-beta sector SPDRs are Technology (NYSEARCA:XLK), 0.92; Consumer Discretionary (NYSEARCA:XLY), 1.00; and Industrial (NYSEARCA:XLI), 1.20. The highest-beta sector SPDRs are Energy (NYSEARCA:XLE), 1.50; Financial (NYSEARCA:XLF), 1.40; and Materials (NYSEARCA:XLB), 1.40.

Figure 2: XLU Annual Change, 1999-2013

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted monthly share-price data at Yahoo Finance.

Low beta and low risk are not synonymous, as indicated by the Utilities ETF's behavior during the bursting of the first two of the three massive equity-market bubbles associated with the 21st century (Figure 2). In the first case, the ETF plummeted -13.24 percent in 2001 and -31.10 percent in 2002. In the second case, it plunged -31.65 percent in 2008.

Figure 3: XLU Monthly Change, 2014 Q1 Versus 1999-2013 Mean

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted monthly share-price data at Yahoo Finance.

The Utilities ETF behaved better in January, February and March this year than it has performed in each of those months historically according to the means calculated by employing data associated with its first 15 full years of existence (Figure 3). The same data set shows April to be the ETF's strongest month, in terms of its share price.

In 2014, the Utilities ETF advanced to $42.30 on April 17 from $41.46 on March 31, an increase for the month of 84 cents, or 2.03 percent.

Figure 4: XLU Monthly Change, 2014 Q1 Versus 1999-2013 Median

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on analyses of adjusted monthly share-price data at Yahoo Finance.

The Utilities ETF also behaved better in January, February and March this year than it has performed in each of those months historically according to the medians calculated by using data associated with the period between 1999 and 2013 (Figure 4). The same data set (again) shows April to be the ETF's strongest month, in terms of its share price.

Meanwhile, both the mean and median data sets indicate comparative weakness is common in the Utilities ETF subsequent to May Day.

Figure 5: S&P 500 Utilities Quarterly EPS, 2008 Q1-2015 Q4

(click to enlarge)

Notes: 1. Actual data appears for the period from 2008 Q1 to 2013 Q4, and estimated data appears for the subsequent period. 2. The SPX utilities EPS scale is on the left, and the quarter-to-quarter change scale is on the right.

Source: This J.J.'s Risky Business chart is based on information in the "S&P 500 Earnings and Estimate Report" published by S&P Dow Jones Indices on April 10.

On an absolute basis, the Utilities ETF's share price may not grow as fast during the rest of 2014 as it has to date, based on its seasonality. On a relative basis (i.e., in comparison with the other Select Sector SPDRs), however, the Utilities ETF might continue to overperform, based on S&P Dow Jones Indices' earnings-per-share estimates.

Prepared by S&P Senior Index Analyst Howard Silverblatt, the index shop's latest "S&P 500 Earnings and Estimate Report" provides 2014 and 2015 EPS estimates on quarterly and annual bases not only for the S&P 500 but also for each of its 10 sectors, including the utilities sector (Figure 5).

None of these EPS estimates appear reasonable to me with the U.S. Federal Reserve in the midst of a move to tighter from looser monetary policies. However, some seem more reasonable (or less unreasonable) than do others. And I suspect Mr. Market may be more comfortable (or less uncomfortable) with the anticipated downward revisions in the EPS estimates for the utilities sector than with the expected downward revisions in the EPS estimates for the other nine sectors.

Figure 6: S&P 500 Utilities Annual EPS, 2008-2015

(click to enlarge)

Notes: 1. Actual data appears for the period from 2008 to 2013, and estimated data appears for the subsequent period. 2. The SPX utilities EPS scale is on the left, and the year-to-year change scale is on the right.

Source: This J.J.'s Risky Business chart is based on information in the "S&P 500 Earnings and Estimate Report" published by S&P Dow Jones Indices on April 10.

OK. The U.S. actually had extremely cold temperatures last winter, and it is forecasted to have extremely hot temperatures this summer. So the aggregate demand may be heightened in 2014 for electricity and all the other forms of power provided by utilities such as the Duke Energy Corp. (NYSE:DUK), NextEra Energy Inc. (NYSE:NEE) and Dominion Resources Inc. (NYSE:D). Combined with other factors, this demand might well result in EPS growth in the utilities sector this year, but the currently estimated increase of 11.60 percent strikes me as being a bit on the high side (Figure 6), especially with the Federal Reserve moving to tighter from looser monetary policies.

The Bottom Lines

The relationship between SPY as an equity-market proxy and the Utilities ETF as a stock-market indicator is a fascinating one well worth the study. For example, the sea change in the market this year was clearly telegraphed by the daily SPY:XLU ratio, which hit either a cyclical or a long-term peak of 4.93 on Jan. 3. (It was 4.41 last Thursday.)

Of course, I believe the currently morphing relationship between SPY and the Utilities ETF is a direct or indirect result of shifts at the Federal Reserve, as follows:

  • Changes in Fed leadership, such as the one that took place between the departing Ben S. Bernanke and the arriving Janet L. Yellen last winter, are associated with below-average returns and above-average volatility in the market during the subsequent trading year, as indicated in "The Dow And The Federal Reserve's Transitions."
  • The Fed's actual and projected moves to complete its current quantitative-easing program by the conclusion of this year have allowed a certain math head to calculate approximate values associated with the end of the present bull market, as mentioned in "SPY, MDY And IJR At The Fed's QE3+ Market Top."
  • The Federal Open Market Committee may begin boosting one or more of the interest rates under its control by July 1 of next year, according to Yellen's comments at an FOMC press conference on March 19.
  • And the Fed might start requiring certain financial institutions to hold comparatively larger amounts of capital than they do now, based on Yellen's remarks at a Federal Reserve Bank of Atlanta conference last Tuesday.

It is true on the way up, and it is true on the way down: Don't fight the Fed.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author's best judgment as of the date of publication, and they are subject to change without notice.

Source: Utilities No. 1 Among Select Sector SPDR ETFs In 2014 As Of Mid-April