Watch The Utilities For When The Market Rally May End

The utility sector of the S&P 500 rose off the early 2009 lows much along with the rest of the market.  Relatively speaking however the sector has underperformed and now is approaching a critical level just when the S&P 500 is within arm’s reach of its all-time highs set back in  October 2007.

The chart below shows the relative underperformance of the utilities (orange) versus the S&P 500 (blue), here represented by the SPDR index etf (SPY).  Mind you, the utilities are far from the only sector lagging the broader index (see the financials, energy and materials sectors) but the defensive nature of the utilities sector makes it worth watching as indices approach major resistance levels.

The ever steepening slope of the S&P 500 on the chart below is finally taking the index back up to its all-time highs.  As I often make reference to however, the steeper the slope the closer we are to an eventual correction.  Given the near vertical leap in recent weeks, at least looked at through a multi-year chart, what are the implications on the utilities stocks?

Utility stocks should rise with the tide as stocks lift higher, but not necessarily on par with broader indices.  Thus it is somewhat concerning that utilities have performed on par with stocks in recent weeks.  Viewed on its own, that’s a little early bearish sprinkle worth watchting for the moment.

In terms of the utilities sector on its own, the chart below shows the multi-year  important area of resistance which we are approaching.  If as a proxy we take the Utilities SPDR etf (XLU), the resistance line comes in fairly cleanly at $38.50.  On a the daily closing basis the Utilities SPDR etf (XLU) was only pennies away from this area just two days ago.

In short, the resistance zone at $38.50 is comparable to the approaching all-time highs mark on the S&P 500 (at 1575), in relative terms.  At least some resistance should be felt but more important will be the reaction measured over a few weeks.

The number one thing I will be focusing on however over coming weeks is whether the utilities will manage to display relative out-performance versus the broader market.  Why?  Such would indicate more defensive posturing on the part of investors, which then would likely be followed by equity weakness for a multi-month period.

In other words, while I wouldn’t chase the utilities higher here at this stage, it’s ever so important to watch them react on a relative basis as we continue to squeeze higher and higher in the broader indices.


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