Helping Self-Directed Investors Succeed Blog - What's Ailing the Utilities Sector?

What's ailing the Utilities Sector?

December 16th, 2013

XLU - Utilities Sector SPDR ETF - displays a technical chart that doesn't look impressive at all from our point of view.

XLU logged a 52-week high of 40.63 mid-April and then appears to have topped. It plunged to a low of 35.64 in late June 2013 - a correction slightly over 12%. Since then the ETF has tried to bounce from this low twice in the last 6 months only to succumb to further selling pressure. This week it closed decisively below its 40-week SMA whose slope, interestingly, is still on an incline. A close below this key average usually suggests further price weakness.

What's the problem here? This is one of the few sector ETFs that haven't performed well in the last year since the markets took off sometime after President Obama's re-election. Interestingly, this is the time of the year when most of the country experiences typically a cold winter that typically creates extraordinary demand for electrical/heat energy and Utilities should expect higher revenues overall.

Utilities is always considered a defensive sector and considering the bullish sentiment prevailing it is very likely investors have rotated out to riskier portfolios.

The other typical negative for Utilities is the outlook for higher interest rates. When rates rise, Utilities end up paying more interest on the debt they carry in their books and this affects the bottom line. In the present milieu there is a lot of speculation that rates might go up once the Fed tapers off.

The third area which is suppressing this sector is the rise of the alternative energy sector which appears to be making inroads into various areas of the economy.

Patient, value oriented investors may start looking for attractive options here if the sector faces more pressure and stocks in this space become more attractive priced.

ETF investors may want to keep an eye on XLU as it has now moved below its 40-week SMA. If it finds support here, then probably it is not all that bad for the sector.

Good Luck and Happy Trading!

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