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U.S. utilities are oversold, while Canada’s are just right

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U.S. utilities stocks have made a painful about face this month, which makes this a good time to check the state of the Canadian utilities sector. With slight reservations, things look okay for now.

The American S&P 500 Utilities index started the year on a tear, generating a total return of 19.7 per cent for yield-hungry investors from January 1 to the end of April. In May, the mood turned anxious as shareholders in the sector endured a 7.8 per cent decline.

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The highly useful Think B.I.G. blog from Bespoke Investment Group detailed how technically overbought U.S. utility stocks had become, using their usual method – standard deviation bands based on the 50 day moving average.

Leaving American investors to their travails, I performed the same analysis on the domestic S&P/TSX Utilities Index (see chart). Since the beginning of 2011, the B.I.G. analytical toolbox has provided excellent guidance.

Buy signals – the stock price falling more than two standard deviations below the 50 day moving average – would have worked in November and December 2011 and June 2012 (although a quick trigger finger would have been required) and especially in March 2013. Sell signals in December 2011, March 2012 and July would also have generated returns.

U.S. utilities stocks are actually close to oversold territory, according to Bespoke's work. But based on these results (which, I am at pains to point out, are trading focused and do not include valuation and earnings growth analysis that is essential to investors), domestic utilities stocks prices are at the high end of the reasonably valued category. For traders with short time horizons, there's reason for wariness, but not sleepness nights.

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Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB .

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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