The first look at the relationship between the Energy Sector and the Utilities Sector in February of this year showed that it is a good proxy for the direction of the S&P 500. Updated to the present, the chart below shows the ratio of the Energy Select Sector SPDR (XLE) against the Utilities Select Sector SPDR (XLU).
The shaded area behind the ratio is the S&P 500 (SPX). The 20 day Simple Moving Average (SMA) was added as a signal line. Study this chart. What does it tell you? First it does confirm that the ratio of the Energy Sector to the Utilities Sector is a good proxy for the direction of the broad stock market. Logically this makes sense. If money is flowing from defensive Utilities into Energy it is a sign that the economy is heating up.
Notice that the 20 day SMA has also played a role in confirming changes in direction of this ratio, and so too the market. Crosses in August and October 2011 and March and July 2012 confirmed a change in direction in the S&P. But in November and December 2011 there was a series of quick reversals that technically followed the rule but were much more muted responses.
The recent cross again in September fits the debate about a deep correction or a buyable dip, for now. keep your eye on the XLE/XLU ratio. A strong move lower would give more credence to a deeper correction while consolidation or a shallow angle that buyable dip case.
Disclaimer: The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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