An Intermarket Approach to Beta Rotation: The Strategy, Signal, and Power of Utilities

Charles V. Bilello

Pension Partners, LLC

Michael A. Gayed

Pension Partners, LLC


It is often said by proponents of the Efficient Market Hypothesis that no strategy can consistently outperform a simple buy and hold investment in broad stock averages over time. However, using a strategy based on the principles of intermarket analysis, we find that this assertion is not entirely accurate. The Utilities sector has many unique characteristics relative to other sectors of the broader stock market, including its higher yield, lower beta, and relative insensitivity to cyclical behavior. Our analysis suggests that rolling outperformance in the sector is not only exploitable, but also provides important signals about market volatility, seasonality, and extreme market movement. We explore historical price behavior and create a simple buy and rotate strategy that is continuously exposed to equities, positioning into either the broad market or the Utilities sector based on lead-lag dynamics. Absolute performance and risk-adjusted returns for this beta rotation approach significantly outperform a buy and hold strategy of the market and of the Utilities sector throughout multiple market cycles.

An Intermarket Approach to Beta Rotation- Introduction

Buy and hold is often touted as the ultimate investment strategy when it comes to stock market investing. The reasoning for this relates to the belief in the Efficient Market Hypothesis, which states that because all known information is factored into price, there is largely no edge to active and dynamic trading. Indeed, numerous studies have documented the inability of investment managers benchmarked to a market average to consistently outperform passive strategies through stock selection.1 However, academic studies have also noted persistent anomalies and phenomena in the marketplace which are consistent and exploitable, putting the Efficient Market Hypothesis in doubt.2 Many of these studies focus on momentum and seasonality, and tend to be of intense interest for technical traders.

However, long before the power of momentum and seasonality was discovered through various white papers on those subjects, market technicians intuitively noticed price behavior which could lead broad market averages. Using intermarket analysis, a branch of technical analysis that has grown tremendously in recent years, technicians have uncovered relationships between asset classes which can be predictive of economic and market cycles. One of the more recognized relationships is between bonds and stocks, where bonds tend to lead preceding equity market tops and bottoms. It stands to reason then, that Utilities, the most bond-like sector of the stock market, would also show such
leadership characteristics.

John Murphy, winner of the 2002 MTA Annual Award and a pioneer in the field of intermarket analysis, explored this concept in depth.3 Murphy has stated that prior to a stock market top the “interest rate sensitive stocks, like the utilities and banks, usually start to break down. The most prominent and reliable are the utilities.”4 Martin Pring, winner of the 2004 MTA Annual Award and also an innovator in the field of intermarket analysis, wrote of the “tendency” for Utilities to “put on their best performance relative to the market on either side of the bear market low.”

Edson Gould was another technician who wrote of the power of Utilities many years earlier. Gould, who was referenced in 1977 as the “dean of technicians” by Forbes magazine and received the MTA Annual Award in 1975, focused specifically on the leadlag relationship between Utilities and the market. In his 1974 writing, Gould referred to the Dow Jones Utilities Average as “one of the best early indicators of the stock market.”

By noting how Utilities price action moved, Gould was able to make several accurate broad market forecasts. He postulated that “the Utilities reflect to a greater extent than the Industrials the investment demand for stock” and argued that “Utilities are money sensitive. Their steady growth requires huge and insistent capital investment so that their position and outlook is more dependent on interest and capital rate changes than are Industrial shares.”

Beta Rotation

See full PDF here.