Looking at XLU’s chart, it is clear “that the price has recently fallen below the support of its 200-day moving average and also broke below the neckline of a well-defined head-and-shoulders pattern. This bearish price action suggests that the downward momentum is likely to continue and some may even use the bearish crossover between the 50-day and 200-day moving averages as a signal of the beginning of a long-term downtrend,” according to Investopedia.
The bond-esque utilities sector has also weakened alongside the fixed-income market as Treasury yields rose on the Fed outlook and inflationary pressures. Once the Fed eventually hikes interest rates, the higher rates will make fixed-income instruments more attractive on a relative basis, and bond-like equities, like utilities, less enticing. Consequently, utilities may remain flat or underperform other segments of the equities market once rates start ticking higher.
Related: Surging Utilities ETFs
FactSet projects the utilities sector is expected to experience earnings growth of 4.4% in 2016. Consequently, analysts warned that the lofty prices may not be supported by robust earnings growth.
For more information on defensive ETFs, visit our defensive ETF category.
Utilities Select Sector SPDR (NYSEArca: XLU)
