U.S. stocks just shot through the ceiling…
On January 19, the S&P 500 Index closed at an all-time high. Stocks are now pricier than ever.
If you were investing in 2021 and 2022, today’s market environment may feel eerily familiar…
After all, the last market peak was in January 2022 – just after the post-pandemic rally. Over the next 10 months, stocks dropped 25%. Investors suffered the worst annual return since the 2008 financial crisis.
Now, the S&P 500 is back at all-time highs… And it’s happening after a breakneck 2023 bull run.
It may feel like all the money in stocks has already been made… or worse, that we’re due for a repeat of the 2022 bear market.
But one indicator disagrees. It shows that now is still a great time to go long – because stocks aren’t done rising yet…
If you want to know where the market is headed, take a look at utility companies.
These businesses are the bedrock of a functioning society. They keep the heat running, the gas flowing, and the lights on in America. These companies offer services that folks will always need. So they tend to be extremely safe investments in times of uncertainty.
In other words, utilities act as a “risk hedge.” Investors buy up utilities when the future looks rough… and sell them when the coast is clear so they can reinvest the money elsewhere.
We can gauge investors’ risk tolerance by their utility investments…
To do this, I looked at the price of utilities relative to the price of the S&P 500.
I used the Utilities Select Sector SPDR Fund (XLU), which is an exchange-traded fund that holds a broad basket of utility companies. And I divided XLU’s price by the price of the broader index.
The resulting ratio tells us when utility stocks are more popular than other sectors. When the ratio is high, it means that investors are buying utilities and bailing on other parts of the market… And when the ratio is low, it means that folks are selling utility stocks in search of riskier rewards elsewhere.
Today, the ratio of XLU to the S&P 500 is at a decade-plus low. Take a look…
You can see the ratio’s spike in 2022 as investor fear took over. But now, XLU has crashed to its lowest price in years relative to the broader market… And the ratio is still plunging.
In other words, investors aren’t seeking the safety of utilities today. They expect smooth sailing ahead. So they’re putting cash to work in other areas of the market.
It’s normal to be skeptical when stocks are at all-time highs, especially when they’re coming off a bad downturn. But based on the relative weakness in these “safe havens,” momentum is still on the side of the stock market.
This is a clear message we don’t want to argue with. Once this ratio turns, that’s when we’ll get cautious. Until then, don’t fight the trend… We want to own stocks today.
Good investing,
Sean Michael Cummings
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Source: Daily Wealth