After higher supply estimates by the International Energy Agency, traders once again found reasons to sell stocks across the board. West Texas Intermediate contracts which opened at $30.17 fell to just 20 cents off their low at $27.94. Analysts continue to point to a coordinated cut by major oil exporters as the only remedy to low oil prices, a point that is rebutted once more by increased production from OPEC. The International Energy Agency reported that the cartel added about 280,000 extra barrels onto the market with sanctionless Iraq ramping up output in order to join the relentless hunt for more market share. With every day of depressed oil prices, price projections turn bearish and volatility appears to increase. Before this year, only a select few would have guessed contracts could be valued so low.
Because of all the bewilderment over crude oil, suppositions about global growth are being called into question as well. Just as WTI crude has lost just over -25% this year so far, the S&P 500 has dropped -7.91% and the Global Dow has plunged -11.05%. The largest losses have come from European countries saddled with debt and emerging markets in a similar situation. Greece's stock market, the Athens Stock Exchange (ASE), reached a 52-week low today while boasting a -28.59% YTD performance so far. Equities are mostly falling in response to a debt problem that has been alluded to here multiple times. The popular U.S. treasury bond is slowly approaching the bearish signs of an inverted yield curve as 5-year, 10-year, and 30-year U.S. bonds saw their yields drop while 3-month and 2-year notes remained the same. Needless to say, there are large amounts of uncertainty surrounding the future with daily losses adding to the negativity.
What if I told you there are some stocks that appear impervious to these weaknesses? Is there a winner among the losers? And could it be a whole sector? Well, there might be something like that, but its performance isn't explained by strength in the sector, but rather, the cyclical nature of its trading. The Dow Jones Utility Average beat the Total Market average with gains of 0.67%, but that's not even the impressive part. As about 78% of S&P stocks trade below their 200-day moving average, the DJ Utility Index trades around its 52-week high of 629.68. The sector's year-to-date performance is 8.53% in a year that is so heavily defined by weakness and volatility. This deviation can be attributed to a utility stock's tendency to have a lower beta (volatility versus the overall market) than other equities (AEP, a member of the DJU). Because utilities like water and power are supposed as necessary, their financial integrity is less likely to weaken in economic downturns. On top of that, they tend to pay out good dividends with less uncertainty on the price tag. As volatility hits stocks that are more vulnerable to demand and supply shifts, investors rotate their money into stocks like these that can provide more safety than their peers in other sectors.
Michael Gayed's book Intermarket Analysis and Investing discusses the connection between fundamental, technical, and economic trading. The premise of his book is that a combination of the three kinds of analysis is the best way to produce projections and insights with the most accuracy. Using Dow theory, Gayed shows a connection between the Dow Jones Utility and the trend in interest rates as an insight into the health of the overall market. When interest rates rise as they do in an overheated market, utility stocks lose their capital to other stocks that are on the rise. As interest rates fall, utility stocks benefit from the volatility that usually causes the interest rate cuts. In short, utility stocks typically lead the rest of the market where a peak from the DJU might signal a peak in the DJIA and a trough would signal a near future trough.