Utilities stocks and sector-related exchange traded funds are the worst performing area of the U.S. markets this year, but the sell off may be overdone.
“We know the relationship [between yields and utilities]is inverse, but at some point a lot of it becomes priced in, at least in an intermediate basis,” technical analyst Carter Worth, head of technical analysis at Cornerstone Macro, told CNBC.
Specifically, looking at the 10-year performance of the Utilities Select Sector SPDR (NYSEArca: XLU), which tracks the S&P 500 Utilities sector, XLU is testing its long-term downtrend resistance but remains in an uptrend support. [For the Contrarian, Utilities ETFs Offer Allure]
In the past 10 years, “after you’ve reached a difficult level in the U.S. 10-year yield, you see the chart either back away or back and fill,” Worth said. “And the reciprocal of that would imply that we get a bounce off our trend-line in utilities and get a 4 to 5 percent rally.”
The utilities sector has exhibited a solid long-term ascending channel, or an upward sloping parallel technical range between support and resistance levels. Ever since the financial downturn, XLU has recovered quite positively in the previous six sell-offs.
Since 2009, “the S&P 500 utilities sector has experienced six distinct intermediate declines,” from which it has rallied. “It’s all been quite symmetrical, so what we would play for is the countertrend move back,” Worth added.
The chart shows that in each instance, the sector has created higher lows and higher highs. Traders, though, should be worried once the sector shows a lower low below the lower bound resistance level, which can signal a potential change in its upward trend.