Whacking the Market

Have you noticed how sometimes market segments simply don’t do what they are supposed to do?

We all know that when the market gets ugly, we look to gold, consumer staples, utilities, bonds, etc. for downside protection.  And, for the most part, these do work.  However, there are times when the market gets “whacked” really hard, and all the rules seem to go out the window.

I have worked with utilities for the last 2-3 months.  I chose them because of the historical poor performance during the May-October period.  For the most part, it seems that:

  1. When the market drops, the utilities drop only about 50% of the S&P 500 drop.
  2. When the market goes up, the utilities seem to gain about 75% of the S&P.
  3. When the market is choppy, the utilities typically gain against the S&P.

There are times, however, when the market just gets whacked (this week being a good example).  On Wednesday, the utility market misbehaved by being one of the lowest performers in the lead-up to the Fed announcement.  This is understandable because lots of people were hoping for a Fed surprise that would thrust the market up.  Everyone wanted to have their cash ready to buy bullish sectors, which meant few people were buying utilities and many others were selling utility positions to raise cash.

When the Fed decision came and produced a yawn, people seemed to pause.  This seemed to whack the utility sector more than others.  Utilities continued to slide for the rest of the day.

Then came Thursday with some bad economic news and the market started down.  Utilities tried to jump back into their normal role and were up for a while.  But then when the market decided it was serious about going down, the utility hedge factor quickly disappeared.  The one of the “normal rules” (#1) still applied, however, and the utilities only lost about 50% of what the S&P lost for the day (about 30 points).

Today, Friday, the utilities are lagging behind the market.  We are showing a +.4% for S&P, but flat for utilities.  On the sector list, utilities are almost at the bottom.  For the first three hours, aside from opening gap, the market has been flat.  The “quick” money people that jump in and out of the market are busy jumping on the equities that were beat up the worst yesterday.  And everyone else is sitting in cash and licking their Thursday wounds.

I hope the utilities get back to “normal” soon.  They have been good to me for the last 2-3 months, and I want that goodness to continue.


Tell me what you think!