Technical Sunday: Utilities sector ETF XLU

Mike Zaccardi, CFA, CMT

The XLU Utilities sector ETF rebounded nicely from the March 23 low below $44 to a high on April 9 just shy of $62, about a 40% increase. Since early April, however, prices have been consolidating with a downward bias.

The current chart feature I notice is a symmetrical triangle off the all-time high in February 2020 at $71 to the March 23 nadir. Technicians need to watch this chart closely for a break out above $58 or a break down below $54. A move above the consolidation pattern would likely trigger a bullish advance while a selloff below support could draw further downside.

Interestingly, from an intermarket perspective, is what is happening in interest rates. The benchmark US 10-year Treasury yield has been range bound itself between 55 basis points and 80 basis points despite volatility in the equity markets.

Interest rates and the utilities sector tend to move inversely as utilities often rely on debt financing for the operations given their businesses are typically quite reliable and not at all volatile.

This year has been a bit of a different story, however. Many pundits have called into question the viability of utility customers to pay their bills on time. Even many businesses are struggling to meet their near-term debt obligations. A recent study showed that business to business late payments have risen sharply this year, surpassing levels from the Great Financial Crisis in 2009.

Back to the charts, the recent consolidation could mean interesting things for the broader equity markets. A positive move could imply good things as it means debt payments are being made and the Federal Reserve’s policies have been successful. The bearish narrative would be a deterioration in utility company stock prices could mean a second wave of bearish news in the financial markets.

Chart used with permission from TradingView.com; follow me on Twitter @mikezaccardi