After a standout year for income-generating assets in a stubbornly low-yield environment, utilities sector exchange traded funds are beginning to breakout relative to the broader S&P 500 index.
The utilities sector are the second best performing area of the S&P 500, with the S&P 500 Utilities Sector Index up 21.0% year-to-date. Meanwhile, the Utilities Select Sector SPDR (NYSEArca: XLU) has increased 25.1% year-to-date. In contrast, the S&P 500 index is only up 11.1% so far this year. [U.S. Energy Boom Energizes Utilities ETFs]
With the recent outperformance in the utilities space, XLU is beginning to breakout relative to the S&P 500, writes J.C. Parets for All Star Charts.
Specifically, looking at the weekly line chart of utilities relative to the S&P 500 from 2008, the charts reveal a falling wedge pattern with two converging downward slopping trendlines. The line chart has shifted to a sideways pattern and may potential breakout of the wedge pattern. Technical analysts see a breakout of the wedge as bullish of the break appears above the upper downward slope.
However, Parets argues that the breakout is real if it can top the April highs, which would signal a potential rally for utilities 2015 as well. Additionally, a breakout would also confirm the low rates thesis that Treasury yields will remain low, pushing investors to alternative sources for income.
“Pullback in interest rates has been a nice benefit for the highest-yielding and most-defensive utilities,” according to Morningstar analyst Robert Goldsborough. “Our analysts also believe that if Treasury rates stabilize closer to 3%, utilities actually could outperform the market.”