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Which Stock Market Sector is Ready for a Fall?

Sometimes you look at the market and just shake your head. Trends that should be taking place aren’t, a stock market sector that should be growing isn’t.

As you look at the sectors of the S&P 500, one stock market sector sticks out as getting ahead of itself. While the S&P 500 has been stuck between 2700 and 2800 for the past two months, the Utilities Sector has had a nice 5% move since June 1st.

Utilities are not impacted by the most recent trade wars so they become a convenient place to flee in a trade war environment. Lurking around the corner, however, is the rising interest rates. Rates have not made a major upward move yet, but with the Fed tightening, and wages rising, the market is beginning to anticipate rates climbing.

In a rising interest rate environment, utilities are one stock market sector that generally suffers. They are often considered a safe dividend income play. When you can invest in treasuries for a comparable yield, investors often opt to shift into bonds. That calculus should begin to play out in the second half of the year.

In fact, Wall Street Analysts, who are largely an optimistic bunch are forecasting a target price that is only .2% above where utilities are trading now. They are also looking at the recent price moves and shaking their heads. See the chart below which compares each sector’s current price with the target price. The S&P is estimated to have a 12% price move in its future.

When you look at Chaikin Analytics, the chart is not flashing warning lights yet, but there is some small breadcrumbs that is alerting the investor to pay attention.

Bottom line: keep an eye on the Utilities stock market sector. It has defied logic to have a nice run during a rising interest rate environment, but similar to a rubber band, it has stretched ever more taught. It may be ripe for the snap back.