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
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 (
) 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.
),Westar Energy (
),Sempra Energy (
) 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