No Need For a Crystal Ball, Just Look at Energy and Utilities

• Posted by Greg Harmon
• on October 11th, 2012

The first look at the relationship between the Energy Sector and the Utilities Sector in February of this year (link here) showed that it is a good proxy for the direction of the S&P 500. Updated to the present that chart below shows the ratio of the Energy Select Sector SPDR, $XLE, against the Utilities Select Sector SPDR, $XLU. The shaded area behind the ratio is the S&P 500, $SPX. The 20 day Simple Moving Average (SMA) was added as a signal line. Study this chart. What does it tell you? First it does confirm that the ratio of the Energy Sector to the Utilities Sector is a good proxy for the direction of the broad stock market. Logically this makes sense. If money is flowing from

defensive Utilities into Energy it is a sign that the economy is heating up. Notice that the 20 day SMA has also played a role in confirming changes in direction of this ratio, and so too the market. Crosses in August and October 2011 and March and July 2012 confirmed a change in direction in the S&P. But in November and December 2011 there was a series of quick reversals that technically followed the rule but were much more muted responses. The recent cross again in September fits the debate about a deep correction or a buyable dip, for now. keep your eye on the $XLE/$XLU ratio. A strong move lower would give more credence to a deeper correction while consolidation or a shallow angle that buyable dip case.

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