Watch the Utilities for the Rally’s End

by Serge Berger | March 8, 2013 8:28 am

The utility sector of the S&P 500 has risen off the early 2009 lows much along with the rest of the market. Relatively speaking, however, the sector has underperformed and now is approaching a critical level — just when the S&P 500 is within arm’s reach of its all-time highs set back in October 2007.

The chart below shows the relative underperformance of the utilities — orange line, represented by the Utilities SPDR (NYSE:XLU[1]) — vs. the S&P 500 — blue line, represented by the SPDR S&P 500 ETF (NYSE:SPY[2]). Mind you, the utilities are far from the only sector lagging the broader index (see the financials, energy and materials sectors), but the defensive nature of the utilities sector makes it worth watching as indices approach major resistance levels.


The ever-steepening slope of the S&P 500 on the chart below is finally taking the index back up to its all-time highs. As I often make reference to, however, the steeper the slope, the closer we are to an eventual correction. Given the near-vertical leap in recent weeks — at least looked at through a multiyear chart — what are the implications on the utilities?


Utility stocks should rise with the tide as stocks head higher, but not necessarily on par with broader indices. Thus it is somewhat concerning that utilities have performed on par with stocks in recent weeks. Viewed on its own, that’s a little early bearish sprinkle worth watchting for the moment.

In terms of the utilities sector on its own, the chart below shows the important multiyear area of resistance which we are approaching. The XLU’s resistance line comes in fairly cleanly at $38.50. On a the daily closing basis, the Utilities SPDR was only pennies away from this area just two days ago.

In short, the resistance zone at $38.50 is comparable to the approaching all-time high-water mark on the S&P 500 (at 1575), in relative terms. At least some resistance should be felt, but more important will be the reaction measured over a few weeks.


The top thing I will be focusing on over coming weeks, however, is whether the utilities will manage to display relative outperformance vs. the broader market. Why? Such would indicate more defensive posturing on the part of investors, which then would likely be followed by equity weakness for a multimonth period.

In other words, while I wouldn’t chase the utilities higher here at this stage, it’s ever so important to watch them react on a relative basis as we continue to squeeze higher and higher in the broader indices.

Serge Berger is the head trader and investment strategist for The Steady Trader[6]. Sign up for his free weekly newsletter here[7].

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