After a gravity-defying 2014, shares of utility stocks could be poised for a bruising in the new year, according to fundamental, technical and historical analysis.
Utility stocks, never very popular among traders because of their small stature and boring business models, have posted the biggest gains among the S&P 500's 10 sector groups this year on the back of low interest rates and falling energy prices. The latter lowers the group's operating costs, while the former makes the companies' hefty dividend payouts look relatively attractive to investors hunting for yield.
The S&P Utilities SPDR ETF is at a record high, up 29 percent in 2014. The last time it had a year like this was in 2011, when the sector gained 20 percent. It was then the worst sector in the S&P 500 the following year, posting just a 1 percent rise.
"I don't love utilities going forward because I believe that, at some point, interest rates will rise and when that happens they will crush the utilities," said Jim Iuorio, managing director at TJM Institutional services in Chicago.
Just how crazy has the run in utility shares gotten? At current levels, the utility sector has a price-earnings ratio of almost 19, bigger than the 18.5 P/E for the whole S&P 500, according to Bespoke Investment Group. That means theoretically, investors are pricing these stocks as if the business of power generation will be more profitable in coming years than those of the rest of the market, an unlikely scenario.
The price move has been just as unlikely using statistical analysis by Kensho, a quantitative trading tool used by hedge funds. As of Monday, the price of the Utility ETF was nearly three (that's right, three) standard deviations above its 50-day moving average, a condition that puts the odds of a decline in the coming weeks at greater than 90 percent, according to Kensho.