The Week Ahead – Market Indicators for November 07, 2011
Sector Analysis Using Technical’s and Sentiment

The Market Indicator for the Week Ahead, centers on the Utility Sector and how to Profit from this Insight!


sector analysis

In the week ahead take note of up-trending stocks, which are looked upon skeptically by the investing public, as an indication that a lot of potential buyers are sitting on the sidelines to see what will transpire. As the rally continues, more and more investors will take notice, and that sideline money will begin drifting into the stock -- thereby furthering the gains. With any luck, you will have bought into the stock ahead of the rest of the investing crowd, allowing you to enjoy a fast and furious rally.

By looking at the individual sectors, especially in the week ahead, and also during times of consolidation, it is especially helpful if you are inclined to want to build both a long and a short portfolio. Sector analysis helps you separate the strongest and the weakest sectors. After all, not all sectors move in the same way as you will see below.

sector analysis heading

for the Week Ahead

One method to adopt for the week ahead is by using a technical approach in trying to identify what is driving investor psychology as it is reflected in the share price. By using chart patterns, support and resistance, as well as a growing set of indicators, technicians look at price and volume to discover where the share price is most likely to go, over a specific period of time.

Fortunately, technical analysis does not care if the tools are for a specific stock, sector or for the entire market. The tools work well for each end of the spectrum as well as anything in between. As a result, technicians are able to offer their analysis of any sector using ETFs just like any stock or market index. This gives technical analysts an important advantage over those that only follow fundamental analysis when evaluating industry sectors.

”Sector Analysis” is a review and assessment of the current condition and future prospects of a given sector of the economy. Sector analysis serves to provide an investor with an idea of how well a given group of companies are expected to perform as a whole. Stocks within a sector tend to move together, because companies within the same industry group are affected in similar ways by market and economic conditions.

Sector analysis is typically employed by investors who are practicing a sector-rotation strategy, or by those who are using a top-down approach to selecting stock to invest in. In the top-down approach to investing, the most promising sectors are identified first, and then the investor reviews the companies within that sector to determine which individual stocks will ultimately be purchased.

One simple but effective way to analyze sectors, in the week ahead, is to look at the percentage of stocks that are trading above their 200-day moving average. A sector with a lot of stocks on the rise will show a higher percentage of names above that closely watched trend-line. Then, observe the percentage of "buy" ratings given to the sector components by analysts.

Based on these conditions, a bullish composure can be affected on sectors with a high number of stocks above their 200-day moving averages, but with a very low percentage of "buys." Similarly, a bearish stance can be taken on sectors that have a minimal percentage of stocks above their 200-day, but a preponderance of bullish analyst ratings. This is not always the case to employ -- going against the trend – however; this seems to be an appropriate move for the week ahead!


Utilities for the Week Ahead

Looking at the tables below, the first two sectors on the list are very obvious -- they're both utilities. The electric and gas groups have about 75% of stocks above their 200-day moving averages, yet the percentage of "buy" ratings from analysts is only 39% for electric utilities, and 48% for gas utilities. These stocks are often considered to be very "boring" and slow-moving, but they have evidently been moving higher for some time now. Clearly, analysts – and the majority of investors, particularly those on Wall Street -- haven't noticed or bought into the up-coming trend yet.

The Utilities Sector is a category of stocks for utilities such as gas and power. The utilities sector contains companies such as electric, gas and water firms and integrated providers.

As utilities require significant infrastructure, these firms often carry large amounts of debt. With a high debt load, utilities companies become sensitive to changes in the interest rate. As interest rates rise or drop, the debt payments will increase or decrease. The utilities sector performs best when interest rates are falling or remain low.

So, make a move earlier into this sector, during the week ahead, before Mutual funds and other institutional managers, who track industry groups closely to determine which sectors are cooling down, and which ones are coming into favor, take concrete action. Once a sector trend is identified, the group "rotates into favor" as one institution after another begins accumulating shares in the best companies in the group. As more money flows into the group, the best companies become fully valued and money moves into secondary stocks in the sector. Eventually the group becomes overpriced, or economic conditions for the group turn unfavorable, and money rotates into the next hot sector.

Compare the utility sectors I just mentioned above to the coal, non-ferrous metals and steel sectors at the bottom of the table. These groups have very few stocks above their 200-day moving averages (just 15%, 14%, and 6%, respectively), yet these names have garnered about 60% "buy" ratings from analysts. It could be just a matter of time before the downgrades start coming in, and investors flee these sectors in search of greener pastures. Where will they put their money next? Why not utilities, which have been doing quite well?


Most investors purchase electric utility stocks for their high dividend yields. At times, the average yield of stocks in this industry is more than twice the Value Line median. Another key attraction of these equities is their defensive characteristics. Most electric utility stocks are less risky, and less volatile, than nonutility issues. Capital appreciation is not a major consideration for electric utility investors.

Choosing a Utility Company Stock for the Week Ahead

Certain characteristics can be determined when evaluating a utility company for your investment:-

Dividend performance: In most cases, you don’t realize big returns from share price appreciation, so make sure the utility has been increasing its dividend payouts regularly over the last four to five years.

A focused business: Utilities with nonutility businesses are riskier than pure utilities. These outside operations have the potential to divert capital away from dividends, hurting yields. When you look at the company’s earnings press release or annual report, look for income and investment details broken out by separate units of the corporation. These units may be subsidiaries or company units involved in completely different businesses.

Regulatory environment: Some states have tighter regulations than others, and others, such as Texas, are more pro-business. States with laissez-faire attitudes about keeping rates affordable for customers tend to allow utilities to charge higher rates — bad for consumers, but good for shareholders. Florida, Texas, and California are utility-investor-friendly states. Do some research on the Internet to find out which other states fall into this category.

• Although it often gets a negative rap, deregulation isn’t necessarily bad. Because deregulation hasn’t had its intended effects, utilities in a position to take advantage and charge more when supply is short post higher profits. This action may sound shady to customers, but it’s good for shareholders.

Debt load: Utilities often carry large amounts of debt because they own significant infrastructure that requires a lot of upkeep and upgrading. Typically, their liabilities are larger than their assets, but debt higher than 60 percent of total capital should be a red flag. These high debt loads make utilities extremely sensitive to fluctuations in interest rates — as interest rates rise and fall, so do the debt payments. Therefore, utilities perform best when interest rates are falling or remain low.

Very high yields: Be wary of utilities with yields significantly higher than the sector average. High yields mean the company may be shelling out more than 80 percent of its profits, or the stock has been pushed very low. A low stock price may just be due to a broad bear market, but it may point to fundamental problems in the business.

Individual and Potentially Profitable Utility Names Finally, if you're looking for some individual stocks to investigate in the week ahead, below is a table highlighting a number of interesting utility companies. Each of the stocks listed has pretty liquid options, is trading above its 200-day moving average, and has a positive year-to-date return, yet less than half of the analysts rate the stock a "buy."

110711-utility sector

A blend of fundamental and technical analysis works the best in determining sector allocation. Fundamental analysis provides the strategic framework to decide where the best opportunities might lie -- whereas, technical analysis provides investors a logical basis for entry and exit points.

While not definitive, a blend of the strengths of each approach offer investors a rational way to assess the strength and weakness of each industry sector as well as where are the best entry, stop and exits.

No matter what the overall market is doing, you’ll always find some industry groups moving up, and others heading down. A popular investment strategy is to pick the strongest stock in a strong industry, in this case the utilities sector is certainly in a favorable position for the week ahead.



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