Utilities Rising & Transportation Sinking – Sector Rotation Is Providing Clues
Historically, investors gravitate toward more defensive and commodity-focused sectors, such as precious metals, energy, commodities, and utilities, in late-cycle bull markets.
Recently, the stock market is beginning to show us signs that the bull market may be coming to an end. Commodities such as energy, grains, and precious metals have all experienced nice rallies. Price action also confirms money flow coming out of transport and into utilities.
SPY – SPDR S&P 500 ETF Trust – Daily Comparison Chart
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As we review our cycle chart, please note the specific placement of the Transportation, Precious Metal, Energy, and Utilities sectors.
We especially want to focus on the Transportation sector depreciating while the Utility sector appreciates.
These sectors provide us with important clues as to where we are in the current economic cycle.
Utilities Sector UP +7.50% YTD
In March 2022, the Dow Jones Utility Average crossed 1,000 for the first time in its nearly 100-year history as the utility sector is significantly outperforming the market this year.
Many investors believe that the XLU is the most effective risk-reducing equity ETF available and may be looking to the utility sector as a safe-haven play.
Other safe-haven markets that we are following closely are Gold, the U.S. dollar, and the Switzerland franc.
XLU – SPDR Select Sector ETF Utilities– Daily Chart
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Transportation Sector Down -15.92% YTD
The transportation sector has dropped approximately -21.59% from its peak in November 2021. Market cycles are measured from peak to trough. Generally, traders consider a stock index in a bear market when its closing price drops at least 20% from its peak. The move in the XLU from 100.00 to 80.00 also represents a drop of 33.33% of the total 2020-21 bull market move.
On April 1st, the U.S. Department of Labor reported that the number of truck transportation jobs fell in March after 21 consecutive monthly gains. Then on April 8th, Bank of America (NYSE: BAC) downgraded multiple transportation stocks, citing “waving demand and price dives.” Bank of America analyst Ken Hoexter told clients, “Given deteriorating demand outlooks and rapidly falling freight rates, we downgrade ratings on 9 of the 28 stocks in our coverage universe”.
The transportation index was created in July 1884 by Charles Dow and has long been viewed as a leading indicator of the broad market’s direction because economic demand shows up first in shipping orders. Historically, a down-turn in freight indicates a potential broad economic recession.
XTN – SPDR S&P Transportation ETF – Daily Chart
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