Is It Time to Dump Utilities?

U.S. markets are closed for Labor Day on Monday, meaning it's a holiday-shortened week. While the S&P 500 Index (SPX) has tended to be more volatile than usual the Tuesday after Labor Day -- meaning it could break out of the narrow channel that's confined it since July 8 -- one sector has historically underperformed during the holiday week: utilities. As Schaeffer's Senior Quantitative Analyst Rocky White pointed out earlier, below are the 20 worst S&P stocks during Labor Day week over the past 10 years, with PPL Corp (NYSE:PPL) and Public Service Enterprise Group Inc. (NYSE:PEG) near the top of the list.
 

In fact, half of the stocks on the above list fall under the "Utility Gas" or "Utility Electric" umbrella. PPL, to start, has dropped in each of the past 10 Labor Day weeks, averaging a loss of 2.3%. Since hitting a seven-year high in mid-June, the shares have dropped 13.5% to sit at $34.55, and are poised to close the month beneath their 10-month moving average for the first time in a year. Further, PPL is struggling to stay in the black on a year-to-date basis.

However, options bulls have been doubling down on PPL during the past two weeks. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX (PHLX), the stock's 10-day call/put volume ratio sits at 22.03. In other words, speculators have bought to open 22 PPL calls for every put during the past 10 sessions. This ratio is higher than 89% of all others from the past year, underscoring the healthier-than-usual appetite for bullish bets. A mass exodus of options bulls could exacerbate selling pressure on PPL.

It's a similar story for PEG, which averages a Labor Day-week loss of 1.5% and has been positive just 20% of the time during the past 10 years. The shares have been sliding since hitting a seven-year peak on April 1, giving up 10% to sit at $42.59. Plus, the equity is set to close the month beneath its 10-month trendline for the first time in 2016.

While PEG options volume is typically light, on an absolute basis, puts have been the choice among buyers recently. The stock's 10-day put/call volume ratio sits at an annual high of 168. Further, put open interest just hit a 12-month high last Friday, before August options expired.

As a whole, it's been quite a fall from grace for the utilities sector. At the end of June, the Utilities SPDR ETF (XLU) was at the top of our internal Sector Scorecard. In fact, 89% of the stocks in our "Utility Gas" sector were trading above their 80-day moving averages -- second to only "Precious Metals." The average year-to-date stock return was 21.1%, and XLU boasted an 18.3% return in 2016.

Now, that same sector is near the bottom or our Scorecard, with just 40% of those stocks north of their 80-day trendlines. The XLU's year-to-date return has dwindled to 13.3%, and the average Schaeffer's put/call open interest ratio (SOIR) has nearly tripled, from 0.66 to 1.75. In other words, with some exceptions like PPL, near-term options traders are becoming more skeptical -- and perhaps rightly so, if history is any indicator. (Perhaps they'd feel safer playing these historical September gems?)


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