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Could Utilities Lead Again in 2014?

David Becker
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www.iforex.com

The utilities sector is the strongest of the nine sectors so far in 2014. This is true for the sector SPDRs, which are weighted by market cap, and the equal-weight sector ETFs. The year-to-date performance for the Utilities SPDR (XLU) is up over 13%. The Energy SPDR (XLE) is the only other sector up double digits, but it is still up much less the Equal-Weight S&P 500 ETF (RSP). The Equal-weight Utilities ETF (RYU) is leading the first half with a 14.50% gain so far this year.

The Utilities SPDR (XLU) advanced from 37 in early January to 43.5 in late April, pulling back in May and then challenging this high in early June. The advance in the first half of the year is strong for any sector, especially a “boring” sector like utilities. Will utilities lead again in the second half of 2014? The overall trend is clearly up, but top pickers are circling the wagons as a potential double top takes shape. The June lows mark upswing support at 42.5. A break below this level would reverse the four-week upswing and put in a peak near 43.5. The mid May low marks double top support and this pattern would be confirmed with a break below this level.

Second half performance for the utilities sector could depend on interest rates because utilities were negatively correlated with Treasury yields this year. The XLU advanced as the 10-YR Treasury Yield declined from January to May. Utilities benefit from falling rates because they have high debt levels and lower rates translate into lower interest payments. Lower Treasury yields also make utilities more attractive in the hunt for yield. An advance in the 10-YR Treasury Yield, therefore, could put downward pressure on utilities and put the double top into play.

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