As Azous highlights in the charts below, SPY’s ratio of outperformance relative to IYR and XLU is flirting with the 2013 highs. If those ratios break higher, that would be good for SPY and trouble for IYR and XLU.
However, with 10-year yields residing near 18-month highs, IYR, XLU and related are presenting investors with the opportunity for a mean reversion trade. Savvy, risk-tolerant investors can also consider a pair trade of long XLU and/or IYR, short SPY.
Given the sensitivity of IYR and XLU to Treasurys, the trade should be a winner if yields ebb. IYR has the highest sensitivity to a constant maturity 20-year bond while XLU has the highest sensitivity to the equivalent 10-year bond, according to Rareview Macro.
Charts Courtesy: Rareview Macro