Earlier this week I posted a sector rotation graphic that will be serving as the basis for our allocation tactics as 2009 turns into 2010. If that basic overweight/underweight information by sector was good enough for you, then great. However, I still want to walk everyone through the ‘drill down’ process to see if we can pinpoint which industries – or even which stocks – are carrying the bulk of the bullish load. After all, why wouldn’t we want to own the best of the best?

In any case, to not overload you with too much information in one shot, I’m going to dive deeper into the process using just one sector at a time….. starting with the ‘overweight’ group utilities.

What we know from our last look was that the utility sector has stunk since the March bottom, but has recently come alive. The next question I want answered is, which kind of utilities are leading and lagging? Here’s the answer.

Logistically this is no problem as the data exists – I just have to use my tools to group it properly. Functionally though, the utilities sectors throws us a curve ball with the independent power producers and traders. They’re not ‘like’ the group, but they’re part of the group.

And, my chart confirms just how much they’re not ‘like’ the group.

Utility Industry Performance - 12/10/09

In short, the independent producers and traders blew the rest of the group away. It’s not hard for them to do so – investors love and hate those stocks in unison, and since there are only three (AES, CEG, and DYN), it’s not hard to make this kind of disparity happen. Either way, I’m not interested in them now, as it seems they’re falling out of favor.

That only leaves two other groups… gas and electric utilities. [The fourth data line on our chart is a cap-weighted aggregate of the other three.]

Right away my interest moves to the electric utilities group. Yes, they’re the biggest laggards since the bull market started, but that’s why I like them…. prices are still just off their lows (that’s the whole point of studying sector rotation – to get into trends early). With that being said though, the electric utility group is the hands-down leader over the last month. In other words, their momentum is starting to blossom.

So, now we drill further into the group by looking at how each of its stocks has performed.

Electric Utility Stocks - 12/10/09

With thirteen major stocks in the industry, this chart gets a bit messier. There are three stand-outs though…. American Electric (AEP), First Energy (FE), and Exelon (EXC). All three appear to be coming up off of lows with more bullish momentum than the rest. Almost needless to say, I think those three are the starting point if you wanted to tap into the strategy/analysis.

It’s still a good idea to see if any individual stock picks based on momentum or relative strength also have the actual results to back them up. But, the power of this technical visualization is equally clear.

I’ll be doing this breakdown for other overweighted sectors within the next few days. Stay tuned.