Eoin Treacy's view The
first quarter represented the best start to a year in over a decade, with a
number of shares posting 12 or more consecutive weeks to the upside. Following
such an impressive performance the minimum expectation was for a period of consolidation
allowing the short-term overbought condition to be unwound. So far Wall Street
has approximated just such a ranging consolidation. Europe remains the epicentre
of risk perception and a number of European markets have deteriorated sharply
over the last six weeks. Since late March government bonds have been among the
best performing asset classes, the US Dollar and Yen have rallied and shares
with bond like characteristics have outperformed.
Utilities are generally considered defensive and have benefitted from that connotation over the last few months. The downward trend in natural gas and coal prices has also helped margins and flattered earnings. Natural gas and coal now appear to be bottoming so utility margins are unlikely to widen further unless they raise prices which may be difficult in the current economic climate. Therefore how well energy commodity prices perform over the next few months is likely to have a material effect on the performance of some of the following indices and shares.
The Dow Jones Utilities Average remains in a steady uptrend defined by a progression of higher reaction lows. While prone to occasional volatility, a sustained move below 450 would be required to question the consistency of the medium-term advance. The S&P Multi-Utilities Index has performed even more impressively but shares the general shape of the Dow Utilities. The S&P500 Gas Utilities Index found support in the region of the 2008 peak and the 200-day MA four weeks ago and a sustained move below 375 would be required to question medium-term uptrend potential. The S&P500 Electric Utilities Index has lagged somewhat but is also trending higher. In the UK the FTSE-350 Utilities Index broke out of a 10-month range in March and is currently testing the 2008 peak.
While the US and UK sectors remain in consistent uptrends that commonality does not extend to the global sector. The Dow Jones Stoxx 600 Utility Index, the Bloomberg Asia Pacific Utilities Index and the Topix Electric/Gas Index all broke downwards last year and are ranging with a mild downward bias.
In the USA, Southern Corp (4.8%) , Consolidated Edison (4.01%), Edison International (2.92%), Aliant Energy (3.94%), Ameren Corp (4.78%), Dominion Resources (3.85%), Duke Energy (4.57%), OGE Energy Corp (2.83%), ONEOK Inc (2.7%), Pinnacle West Capital Corp (4.29%), Progress Energy (3.85%) and XCEL Energy (3.78%) remain in consistent medium-term uptrends and found support in the region of their 200-day MAs in the last four weeks. Sustained moves below their respective March lows would be required to question medium-term scope for additional upside.
FirstEnergy Corp (4.62%) broke upwards to a new two-year high three weeks ago and a sustained move below $44 would be required to question potential for additional upside. NV Energy (3.97%) has been ranging in the region of $16 for a year but broke upwards this week and a sustained move below $15.75 would be required to question medium-term scope for additional upside.
National Grid and Drax Group appeared in a list of UK shares making at least new 3-month highs posted in Comment of the Day on September 8th. The sector remains a relative strength leader in the domestic UK market. National Grid (6.14%) broke successfully above 650p three weeks ago and a sustained move below 625p would be required to begin to question medium-term upside potential. Drax Group (5.44%) is one of the UK's few remaining coal fired power stations and is potentially susceptible to regulatory intervention. However, the share's chart action is consistent with medium-term demand dominance. It found support in the region of the 200-day MA and 500p in March and has returned to test the upper side of the range.
In the water sector, United Utilities has been mostly rangebound since late 2010 and has held the progression of higher major reaction lows. It is now testing the upper boundary and a clear downward dynamic would be required to check potential for a successful upward break. Severn Trent (4.43%) broke emphatically above 1600p in late April and has been consolidating the move since. A sustained move below 1600p would be required to question potential for additional upside. Pennon Group (3.83%) surged to hit a new closing high three weeks ago and pulled back to unwind the short-term overbought condition. It found support this week and a sustained move below 700p would be required to question medium-term upside potential.
While the US and UK utility sectors are clear outperformers, the European crisis has created some deeply oversold conditions on a number of utility shares. Spain's Gas Natural is an interesting example since it is reasonably well diversified internationally. However, the company has been cutting its dividend aggressively and been attempting to raise capital through rights offerings. The share has lost momentum as it retests the €10 area and potential for a short covering relief rally has increased.
In conclusion, the US and UK utility sectors offer a considerable number of consistently trending charts. I have limited the above review to those that have either recently found support in the region of the 200-day MA or have just broken upwards. There are also a number of additional shares which are becoming increasingly overextended relative to the 200-day MA and susceptible to reversion. Yields of between 3 and 4.5% are relatively common and a number of the above companies are dividend aristocrats. Provided they remain in consistent medium-term uptrends and continue to pay respectable dividends, the benefit of the doubt can continue to be given to the upside.