NEW YORK ( TheStreet) -- They may seem stodgy and boring, but utility stocks have been as hot as a nuclear reactor on overload. In fact, on Thursday the Utilities Select Sector SPDR ETF ( XLU) hit a 52-week high of $37.20. The one-year chart above illustrates what a ride this ETF has had, with its yield-to-price now well below 4%.
You can see that the utility sector can get ahead of itself during times of high anxiety and market uncertainty. With all the scary news out of Europe the past three months and Treasury bond yields hitting all-time lows, income investors have been acting desperate for stability and yield. Thursday the 30-year U.S. Treasury bond hit a never-before-seen low yield of 2.72%. Can you imagine anyone tying up their money for 30 years at a rate that's less than the true inflation rate? Yet that's exactly what's happening. The bi-polar nature of the stock market these past few months and the rather dismal economic reports about the U.S. economy have combined to motivate yield-hungry investors in the direction of what seems both safe and conservative.
Warning Signs: The Time to Beware Is Now
As we can plainly see from the chart above, the "safe and conservative" mystique of utilities can meld into dramatic disappointment, as was experienced by XLU investors in the summer of 2011. Are we heading for yet another unexpected swan dive for the utility sector? One clue would be to compare how the XLU performs in comparison with a broader market index like the S&P 500. Below is a comparison chart of the XLU vs. the SPDR S&P 500 ETF ( SPY). In fact, since the end of 2011, utilities have not exactly moved in lock-step with the rest of the stock market. When the SPY peaked in late March and early April 2012, the XLU had somewhat of a correction. Since then, the SPY has been in correction mode and the XLU has climbed higher and higher. At some point (perhaps in time for a summer stock rally), SPY will rally and history appears to confirm that the utility sector will cool its heals during that rally.