This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Declining Utility Stocks Signal Gains Ahead for Russell 2000

NEW YORK (TheStreet) -- As funds begin to flow from large-cap names such as Utilities Select Sector SPDR (XLU) into smaller-cap indexes such as iShares Russell 2000 Index (IWM), U.S. equities may be poised to push towards new record highs.

The utility sector index is most heavily weighted by Duke Energy Corporation (DUK - Get Report), NextEra Energy Inc (NEE - Get Report), Dominion Resources Inc (D), Southern Co (SO) and Exelon Corp (EXC).

Utility stocks have broken key support areas in recent weeks, signaling that further selling pressure could take shape. In contrast, the Russell 2000 index is experiencing buying pressure off of long-term support levels, indicating possible strength ahead.

Read More: 10 Stocks Carl Icahn Loves in 2014

The relationship between the Russell 2000 index and utility stocks is significant as it represents investors' appetite for risk. From March till early May, the small cap index declined nearly 10%. Investors feared that both high-beta internet stocks and biotech companies were entering bubble territory after large gains the previous year. During that time, utility stocks outperformed the broader SPDR S&P 500 Index (SPY) as investors bought up low-beta assets to avoid volatility in U.S. equities.

XLU Chart
XLU data by YCharts

The recent shift from utility stocks to small-cap stocks has come amid a few key macro-fundamental developments. The U.S. economy last week proved healthier than was previously believed. Economic activity and the labor market did not only show positive data in the second quarter, but first quarter numbers were revised higher.

Similarly, geopolitical risks in Gaza and Ukraine look to be lessening after spiking last week on a flurry of headlines. Declines in both United States Oil (USO) and safe-haven SPDR Gold Shares (GLD) show that investors are not currently as concerned as they once were with overseas events. 

Read More: 9 Stocks George Soros Is Buying in 2014

Funds flowing into higher-beta U.S. assets sends a very loud message that investors are still willing to buy stocks on dips. An improving economy, diminishing geopolitical risks, and funds flowing into small cap indexes indicate that the rally in U.S. equities may not be finished just yet.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DUK $74.84 0.66%
NEE $103.82 1.10%
YHOO $45.48 2.30%
AAPL $124.11 -0.10%
FB $83.55 0.65%


DOW 17,691.18 +12.95 0.07%
S&P 500 2,056.70 +0.55 0.03%
NASDAQ 4,878.1490 +14.7870 0.30%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs