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Utility Sector Divergence Between Smart and Dumb Money

Stock-Markets / US Utilities Aug 20, 2010 - 12:44 PM GMT

By: Guy_Lerner


The Utility Sector is thought to be a safe haven in the time of market duress. There is no question that the market is under pressure, but I would be very careful about betting on the assumption (dogma?) that safety will be found in the Utility Sector. Currently, it should be noted that utility company insiders are net sellers of their shares to an extreme degree.

This is the "smart money". On the other hand, utilizing the Rydex asset data, these market timers (who we might call the "dumb money" because of their propensity to get it wrong) are betting to an extreme degree on higher prices in the Utility Sector. I ask: in such a weak market, why would I bet against the "smart money" and on the "dumb money"?

Figure 1 is a weekly chart of the S&P Select Utilities Spyder Fund (symbol: XLU). The indicator in the middle panel is the "smart money", and this is the InsiderScore buying and selling index for company insiders in the Utility Sector. The trading bands look for extremes in the data with a 52 week look back. The indicator in the lower panel is the "dumb money", and this is the amount of assets in the Rydex Utility Sector Fund. Currently, these market timers have plowed the highest amount of assets ever into this sector fund.

Figure 1. XLU/ weekly

So the current set up has the "smart money" selling and the "dumb money" buying - both to an extreme degree. Past and similar set ups are noted by the vertical blue bars in figure 1. If the past is any prologue for the future, it would seem unlikely that investors will find salvation in the Utility Sector.

By Guy Lerner

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of and as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2010 Copyright Guy Lerner - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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