iShares U.S. Utilities ETF (IDU) & Crude Oil Continuous Contract (CL.F)

September, traditionally one of the weakest and most volatile months for stocks, has started cautiously. U.S. indexes have continued their rough ride from previous sessions, with the S&P 500 down 1.29%, NASDAQ falling 2.69%, and the Dow holding up slightly better at -0.28%. European markets are similarly retreating, with the DAX and FTSE down 0.10% and 1.17%, respectively. Commodities are facing mixed pressures: U.S. crude oil has declined another 7% with little recovery, while copper remains under strain, down 3.3% over the past week, due to broader concerns about a global economic slowdown. Mixed PMI reports highlight a struggling global economy, exacerbating worries about resource demand. In currency markets, the Japanese yen is strengthening, up 3% on the week, and gold remains steady above $2,500/oz, suggesting a shift towards defensive assets. The Canadian dollar holds stable as investors digest the Bank of Canada’s fresh 0.25% rate cut, marking the third consecutive decrease. Upcoming economic data, including U.S. ADP payrolls, service PMI, and nonfarm payrolls, along with Canada’s employment figures, will provide further insights into economic health and market direction.

In this report, we will highlight the Utilities sector with the iShares U.S. Utilities ETF (IDU) as a safe harbor for growth investors, along with the Crude Oil Continuous Contract (CL.F), which has an SMAX score of 0 and is underperforming compared to other asset classes, even amid ongoing conflicts in the Middle East.

Utilities, a sector consisting mainly of mature, defensive, dividend-paying, “value” stocks, tends to attract attention from investors during times when interest rates are falling or expected to fall, or when investor sentiment is becoming more cautious. In the rising interest environment in 2022 and 2023, Utilities have struggled relative to the overall market, but this appears to have changed since the beginning of the year.Since the major central banks started to pivot from hawkish to neutral-dovish last fall, the iShares U.S. Utilities ETF (IDU) has stabilized and started to rebound late last year as utilities are a beneficiary of lower interest rates. The iShares U.S. Utilities ETF seeks to track the investment results of an index composed of U.S. equities in the utilities sector.Over the past 12 months, the price of the IDU has been up with a positive return of 28.75% compared to the broad S&P 500 index, which has a positive return of 22.24% in the same time period. Year to date, IDU has a return of +23.55% compared to the S&P 500 at +15.73%. When the market started to come to terms that interest rate cuts were becoming more apparent in the last 6 months, we see an even larger outperformance in the IDU ETF compared to the S&P 500, with a return of +22.60% vs. +7.58% for the S&P 500. This represents a return of 15% outperformance in the Utilities area.In looking at the attached point-and-figure chart of IDU at a 2% scale, we see a steady uptrend over the last 15 years since 2009 as dividend investors were looking for steady income as part of their portfolios. There were 2 instances where the ETF had fairly significant pullbacks, the first being in early 2020 when the Covid crash occurred and the second being in September of 2022 to October of last year during the interest rate hiking cycle. Then, starting in December of last year, the shares started to reassert themselves with a move to the upside. A brief pullback occurred with a 3-box reversal in February of this year as there was a tug-of-war between the bulls and bears over whether the interest rate hiking cycle was over. As the market received more clarity over the past 6 months that the hiking cycle had passed us and cuts were on the horizon, the bulls took charge and have moved the shares higher since April with a strong column of rising X’s comprising 12 boxes without even a 3-box reversal. With such a large move, resistance is soon approaching at $99.98 or the $100 round number. If it manages to break above this psychological level, next resistance is at $114.84 based on a measured move. To the downside, support can be found at its 3-box reversal of $88.78 and, below that, $82.02. With a perfect SMAX score of 10 out of 10, IDU is showing strength against the asset classes.

We have seen some weakness materialize recently in Crude Oil over the last few months. There has been some bearish news lately on the oil front with talk of OPEC ending its voluntary supply cuts next month as well as further economic weakness coming from China, which is the No.1 importer of oil. Couple this with the end of the summer driving season, which has put a headwind on Crude Oil pricing. In fact, oil has fallen back to levels not seen since December, giving back all of its 2024 gains.In looking at the point-and-figure chart at a 2% scale, we see a descending triangle pattern materialize since March of 2022 when the price hit a high of $121.00. Since the beginning of 2023, the pattern has become range-bound between $65.00 and $95.00. Oil is currently near the bottom of this sideways range. What is interesting is that earlier this week, CL.F broke a prior support line at $70.95, which held 4 times previously in December of 2022, as well as February and August (twice) of this year. The next area of support is at the bottom of its trading range at $66.86, which also held 4 times previously. Most noteworthy is if this level of support can be held a fifth time. If it fails to hold that, the next area of support is at $61.77. It will be interesting to see if OPEC backs away from its intentions to end its voluntary cuts and if Crude Oil manages to reverse to the upside, then resistance can be found at its 3-box reversal $76.80 and above that, $79.90 and further resistance at $84.79. With an SMAX score of 0 out of 10, CL.F is not exhibiting any near-term strength against the asset classes.