Friday, August 20, 2010

Utility Sector: Divergence Between Smart and Dumb Money

The Utility Sector is thought to be a safe haven in the time of market duress. There is no question that the market is under pressure, but I would be very careful about betting on the assumption (dogma?) that safety will be found in the Utility Sector. Currently, it should be noted that utility company insiders are net sellers of their shares to an extreme degree. This is the "smart money". On the other hand, utilizing the Rydex asset data, these market timers (who we might call the "dumb money" because of their propensity to get it wrong) are betting to an extreme degree on higher prices in the Utility Sector. I ask: in such a weak market, why would I bet against the "smart money" and on the "dumb money"?

Figure 1 is a weekly chart of the S&P Select Utilities Spyder Fund (symbol: XLU). The indicator in the middle panel is the "smart money", and this is the InsiderScore buying and selling index for company insiders in the Utility Sector. The trading bands look for extremes in the data with a 52 week look back. The indicator in the lower panel is the "dumb money", and this is the amount of assets in the Rydex Utility Sector Fund. Currently, these market timers have plowed the highest amount of assets ever into this sector fund.

Figure 1. XLU/ weekly

So the current set up has the "smart money" selling and the "dumb money" buying - both to an extreme degree. Past and similar set ups are noted by the vertical blue bars in figure 1. If the past is any prologue for the future, it would seem unlikely that investors will find salvation in the Utility Sector.

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