XLU ETF Signals Bull Run, Set to Beat S&P 500 Amid Rate Shifts

Key Takeaway

• Utilities Select Sector SPDR (XLU) shows bullish momentum, indicating a shift to a cyclical bull trend after positive April returns.
• XLU's breakout above the weekly cloud model suggests long-term strength; short-term consolidation seen as an entry opportunity.
• Relative to S&P 500, XLU expected to outperform in coming weeks, supported by potential downshifts in Treasury yields.

Utilities Sector Shines Amid Market Uncertainty

In a month where the broader S&P 500 sectors struggled to post gains, the utilities sector emerged as a beacon of stability, recording positive returns in April and continuing its strong performance into May. This resilience is attributed to the sector's defensive qualities, which tend to attract investors during times of market volatility or weakness. The Utilities Select Sector SPDR (XLU), a key ETF tracking the performance of utility stocks, has notably shifted its momentum, signaling a bullish outlook for the sector.

The change in momentum is underscored by a pending 'buy' signal on the monthly Moving Average Convergence Divergence (MACD), a tool used by traders to gauge the momentum of a stock or sector. This signal, expected to confirm this month, marks a significant turnaround from a 'sell' signal that had been in place since the third quarter of 2022. Additionally, a breakout above the weekly cloud model, a technical analysis indicator, suggests a reversal from a cyclical downtrend to a cyclical bull trend within a larger secular bull trend that has been ongoing since the 2008 financial crisis.

Technical Indicators Support Bullish Outlook

Despite the positive long-term momentum, short-term indicators on the XLU's daily chart hint at potential upside exhaustion, with resistance near a Fibonacci retracement level around $69. This suggests a period of consolidation may be on the horizon before further gains. Such a consolidation phase could present an opportune moment for investors to increase their exposure to the utilities sector, capitalizing on its newfound cyclical bull trend.

Relative to the broader S&P 500, the utilities sector's intermediate-term momentum has shifted positively, indicating a likelihood of continued outperformance. This trend could be further bolstered by a decrease in Treasury yields, given the sector's sensitivity to interest rate movements. Katie Stockton, alongside Will Tamplin from Fairlead Strategies, highlights the sector's potential for sustained outperformance, especially as the market navigates through its corrective phase in the coming weeks.

Interest Rate Sensitivity Plays a Key Role

The utilities sector's performance is closely tied to interest rate movements due to the capital-intensive nature of utility companies and their high dividend yields. Lower interest rates reduce the cost of borrowing for these companies, which is beneficial given their need for continuous infrastructure investment. Additionally, in a low-rate environment, the sector's dividends become more attractive relative to bonds, drawing income-seeking investors. The anticipation of a downshift in Treasury yields could, therefore, act as a catalyst for further gains in utility stocks.

Street Views

• Katie Stockton with Will Tamplin, Fairlead Strategies (Bullish on the Utilities Sector):

  "The recent strength has resulted in a bullish long-term momentum shift for the Utilities Select Sector SPDR (XLU)... The transition to a cyclical bull trend comes within the context of a secular bull trend, which has been in place since the 2008 low and is defined by the rising monthly cloud model." "We would welcome a short-term consolidation phase as an opportunity for investors to add exposure to utilities and take advantage of their new cyclical bull trend." "Relative to the S&P 500, XLU has seen intermediate-term momentum shift positive to suggest it should continue to outperform the broader market when its corrective phase resumes, likely over the next several weeks."