Utility Stocks Are Gearing Up to Rebound… That’s Bad News for Nvidia.

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June 25, 2024
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Dear investors, utilities stocks are gearing up for a rebound. You better be paying attention.

For the last three weeks, the utilities sector has cratered relative to the S&P 500.

On one hand, you might think that’s to be expected. Utility stocks are often seen as defensive, boring plays, and many investors are not passionately following them. But on the other, there’s a case to be made that utilities will benefit from the long-term evolution of artificial intelligence (AI). That makes their underperformance surprising given that Nvidia (NASDAQ:NVDA) has soared to new record highs over the same three-week period.

So, what explains the recent decline?

Although the case for AI driving utility stocks higher is valid, it is not the main factor behind their movement in 2024. Instead, when utilities gained from February to May, it was because investors were taking more of a risk-off approach to investing.

Over the last three weeks, their downward movement suggests that risk-on sentiment was in charge.

Why Utility Stocks Appear Headed Higher Again

Now, the selloff appears overdone. This means that utility stocks could start to resume their uptrend relative to the S&P 500. At the same time, we are seeing strength in long-duration Treasurys.

Why does this matter? It’s been quite some time since utility stocks and long-duration Treasurys have moved in lockstep. And when they do, it’s significant. That’s because utilities are the most bond-like sector of the stock market, and Treasurys are the credit-risk-free part of the bond market. When both assets outperform together, it is a clear signal that a risk-off cycle is unfolding.

And here is where all the puzzle pieces come together. What could spark that underlying risk-off cycle – and the corresponding return of investors to utilities – is Japan and the threat of the reverse carry trade. The Bank of Japan looks set to intervene again to save the yen, and if they spark a short-covering squeeze in that currency, it would, I believe, create havoc for global markets and meaningfully increase volatility.

Utility stocks regaining leadership here suggests that the smart money is positioning for such a correction that would go beyond Nvidia and affect all risk-on assets. I know I’ve been the boy who cried wolf on this. But as I keep saying, the boy was ultimately right. Keep a close eye on utility stocks here.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

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