Investors were jittery late in the second quarter, a scenario that boosted some usually conservative sectors, including utilities. While the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF by assets, is still sporting a small year-to-date loss, the benchmark utilities fund June in style.
In fact, XLU is in the midst of an impressive winning streak and finished June with a gain of more than 2%. Importantly, XLU moved above its 200-day moving average. A gain on Monday would position XLU for a 10-day winning streak.
“It marks only the third time ever that XLU remained below this trendline for more than six months. The last time the ETF crossed above the 200-day after six or more months was in June 2009, just after the March 2009 bottom. Prior to that, you’d have to go back to April 2003, per data from Schaeffer’s Senior Quantitative Analyst Rocky White,” reports Schaeffer’s Investment Research.
Some market observers believe that heightened market uncertainties, which could appear later this year, could bolster the case for defensive sectors, including utilities.
Related: 5 Utilities ETFs Rally as Defensive Plays Return
Utilities Sector to Outperform?
Recently, Morgan Stanley has upgraded the utilities sector to Outperform, arguing that stock prices aren’t keeping pace with earnings growth so far in 2018, which suggests the market participants may be subtly pricing in slowing earnings growth down the line.
Historical data suggest XLU’s moves back above its 200-day line can be a winning trading signal.
“While the sample size is small, it’s encouraging that XLU went on to outperform after retaking its 200-day moving average following six months beneath this trendline. In fact, the fund was higher 100% of the time one, three, and six months later,” notes Schaeffer’s. “More specifically, one month later, the ETF was up 5.21%, on average, compared to an average anytime gain of 0.6%, looking at data since 2003. Three months later, XLU was up 6.4% — more than three times its average anytime gain of 1.9%. Six months after a bullish cross of its 200-day, the utilities ETF was up a whopping 14.05%, on average — nearly four times the norm.”
No sector is as negatively correlated to rising interest rates as utilities, meaning the longer the Fed resists raising interest rates, the longer high-yielding utilities stocks and ETFs remain compelling destinations for yield-starved investors.
For more information on the utilities sector, visit our utilities category.