Weekly Edge: The Technology And Utilities Conundrum

Investors typically place Technology and Utilities at opposite ends of the equity-investment spectrum. Technology falls squarely in the aggressive camp, while Utilities is often the textbook definition of a conservative equity investment. Given this basic difference, they are expected to be opposite each other in any momentum or short-term performance measurement. However, they currently hold the top-two spots, and they have been moving more or less in tandem for the better part of six months.

Sectors: The 68-point spread between the top-ranked and bottom-ranked Sector Benchmark ETFs is four points wider than a week ago, and the magnitude is a stark reminder that stock market “averages” can hide what is going on below the surface. The momentum figures in the accompanying chart are annualized calculations, but the year-to-date return for Vanguard Technology (VGT) is +21.2% versus a 13.1% loss for Vanguard Energy (VDE). This huge 34.3% difference in a little over five months has made a noticeable difference for portfolios that were overweight Technology and/or underweight Energy. This week is a continuation of the conundrum produced by the aggressive Technology sector exhibiting strength at the same time as the defensive sectors of Utilities and Consumer Staples. We are not sure how long these seemingly divergent market attributes can coexist, but history suggests they will soon become uncoupled. Real Estate managed to edge back over into positive momentum territory, while Telecom made a big jump to accomplish the same task. Today, only Financials and Energy remain in the red.

Factors: The strong persistence of performance among investment factors noted a week ago persists again this week. Today’s top-five Factor Benchmark ETFs are unchanged, with Momentum now leading the pack for 13 straight weeks. Growth, Low Volatility, Market Cap, and Quality are the other four factors displaying above-average strength, but they all fall short of seriously challenging Momentum for the leadership position. Similar to the noted dichotomy in the sector rankings, where both aggressive and defensive sectors are near the top, the combination of Momentum and Low Volatility is also at odds with conventional thinking. Momentum is classified as an aggressive factor, while Low Volatility is associated with conservative investing, yet both are highly ranked. Meanwhile, Value is typically cited as being the opposite of Momentum, and true to form, Value is residing near the bottom of the factor rankings. However, Value did manage to move over to the positive side of the momentum ledger this week, leaving High Beta as the lone factor in negative territory.