Thursday, January 20, 2011

Strength in utilities a warning sign for the market

One of the many advantages of being a small trader is the ability to get in and out of the market quickly.  You are able to go from 100% invested on the long side to 100% invested on the short side very quickly, within a matter of minutes.  The big institutions however, aren't afforded this luxury.  They are forced to move their money around to safer sectors.  The utilities being one of those safe sectors are often a great indicator for what is in store for the market.

The XLU, S&P Utilities sector is just now breaking out of a relative strength downtrend that has existed since early Sept 2010 vs the S&P.  The two most recent occurrences of this show that in November 09 the RS breakout marked the beginning of a consolidation phase for the market, in April 2010 the RS breakout marked the beginning of a 20% correction in the SPY.

The SPY is shown in black below while the XLU is green.  Vertical lines mark prior relative strength breakouts.

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