Utilities Indicating This Rally Is Running Out Of Gas

David Dierking

The one good thing about the stock market rally of the past two weeks is that it's looked exactly like you want a stock rally to look.

Small-caps have outperformed large-caps. Cyclical sectors, including materials and industrials, have been leading the way. Traditionally defensive sectors, such as utilities and real estate, have been underperforming.

Treasuries still aren't falling in the way I'd like to say, but outside of that, this has been a healthy looking bounce.

That is until several days ago.

Last week, the growth rally gave way to defensive leadership. Utilities and real estate were the big winners, while past leaders, including tech and communication services, fell way behind.

In other words, the formula that made the equity markets look good recently has been flipped upside down.

In just the past three days alone, the utilities sector has beaten the S&P 500 by more than 4%.


This is a tell-tale sign of a rally that's losing its legs.

Monday's price action was kind of "meh". Large-caps posted some decent gains early, but faded a bit heading into the close. The trading range was narrow, though, and it definitely lacked the sizzle of the past several trading days.

But the headwinds are building up. Stock valuations have gotten way ahead of themselves. The U.S.-China trade war could escalate at any moment. While traders mostly shrugged off the civil unrest going on around the country, the protests could increase the risk of a second COVID-19 outbreak later this year.

Given that, over just the last 12 trading days, large-caps are up more than 8% and small-caps are up more than 14%, a pause to digest some of the recent gains might be in order here.

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