Year's Gains In Utilities Are Fading Away

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Utility stocks are trending downward as the year's rally in the sector quickly fades.

Although utilities often perform relatively better than most other stocks in bumpy markets, the sector's had no such strength lately.

IBD's Utility Leaders screen has been reduced to about eight stocks, and most of them are trending lower.

Not just leaders are struggling. Despite a bounce Thursday, theUtilities Select Sector SPDR ( XLU ) exchange traded fund, which tracks some of the nation's largest utilities, has been sinking since the start of July. It is more than 8% below its prior high.

Of IBD's 197 industry groups, electric power and gas utilities are in the bottom 15 in performance since July 1. Both are down more than 9%. Diversified utilities are off more than 8%.

Part of the weakness is just a normal cooling off following a hot first half of the year for utilities, says Nick Colas, chief market strategist at ConvergEx Group, a brokerage and trading service firm based in New York.

"It was a crowded trade in (the) first half of the year," he said. Now those stocks seem to be reverting to the mean.

Another reason, Colas says, is expectations of higher interest rates. The chatter from institutions is that the benchmark 10-year Treasury note's yield could be around 3% later in the year. It would make utilities' dividend yields less attractive by comparison with bond yields.

Entergy ( ETR ),Westar Energy ( WR ),Sempra Energy ( SRE ) and other utilities have missed earnings expectations the past couple of weeks.

While that news clouds the sector's outlook, Colas believes the weakness has more to do with the direction of interest rates than industry fundamentals.

But there's no imminent threat of cuts to dividends, which historically have made utilities an attractive choice for income investors.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: XLU , ETR , WR , SRE

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