Another Bad Omen for the S&P 500


As the S&P 500 grinds higher, fueled by fresh morsels of hope coming out of Europe, the truth is that so far 2011 is in the loser column with the benchmark down roughly 2% year-to-date.

At the same time, but at the complete other end of the performance spectrum, stands the S&P Utility Sector (XLU), which is up 9% year-to-date and bumping up against a 3-year high. In fact, 85% of the roughly three dozen stocks that make up the utility index are higher for the year. Con Ed (ED), Southern (SO), Duke (DUK) are among the utilities looking like the darlings of the market.

But could they also be a beacon that is sending a clear and ominous warning?

Utilities Sector Breakout

"In my view, (a utility sector breakout) is a message that long-term rates are going to continue to decline because of renewed concerns about U.S. growth, which is in turn a very negative omen for the S&P 500," says Clark Yingst, the chief market analyst at Joseph Gunnar. "Utilities have been exhibiting remarkable relative strength over the past several months."

Not only is this trend an indicator for stocks, bonds, interest rates, and the economy, Yingst says it is "one of the sectors that we favor and we are suggesting clients accumulate utilities," which currently carry a yield of 4% versus 2.2% for the S&P 500.

If that wasn't enough, Yingst says there's another reason to embrace the utility trend; baby-boomers. "The boomers are rapidly approaching their retirement years and the nest egg is no longer there," he says.

As a result, Yingst sees further utility tailwinds coming as baby boomers migrate towards investments that offer capital preservation or income or total return, instead of the growth stocks they've chased for the past 20 years.

Had it not been for a "spectacular 2-year government-financed surge" that effectively masked or hid this growing sector demand, Yingst says the utility theme would be even more pronounced.

View Comments (46)