Is one of the hottest trades of the year finally burning out?
The utilities sector started this year on a tear. From the beginning of January to the end of June, the S&P 500 utilities sector was up nearly 17 percent, making it the best-performing sector over the first half of the year. But since the second half of 2014 started, the sector is down almost 7 percent.
Gina Sanchez, founder of Chantico Global, believes the utilities are going to continue losing power.
“There’s probably a little more downside to come,” said Sanchez, a CNBC contributor. “This was a really bid-up sector in the first half of the year. It was a very crowded trade.”
And as the economy recovers, it could get even worse for utilities. That’s because the high dividends of utilities stocks currently look attractive in comparison to low bond yields, but yields generally rise as an economy improves, making the utilities trade less of a no-brainer.
“When the economy recovers, it tends to leave sectors like utilities behind,” Sanchez said. “If you want to be forward-looking, then I would say that this is probably not a great time to [own] utilities.”
Examining a chart of the ETF that tracks the utilities sector (which trades under the ticker symbol XLU) Ari Wald is a bit more constructive on utilities.
“We don’t expect a lot of downside here,” said Wald, the head of technical analysis at Oppenheimer & Co. “XLU has been beaten up. It’s holding its 200-day moving average and beginning to stabilize here.”
But when given the choice between the XLU and the ETF that tracks the S&P 500 itself (ticker: SPY), Wald chooses the SPY.
To reach that conclusion, Wald looks at a chart of the relative ratio of the XLU and the SPY. “You take the XLU price, you divide it by the S&P 500,” said Wald, explaining how the chart is made. “Rising line says XLU outperforms, falling line is the one that underperforms.”
What Wald notes in the chart is that the XLU has been slowly underperforming the S&P 500 over the past three years. After an initial pop up in relative performance at the start of 2014, it once more resumed its underperformance.
“There’s really not a very strong long-term base here,” Wald said. “Momentum is inflecting lower. We think utilities continue to underperform the S&P 500. From a portfolio-strategy perspective, we would be underweight this sector.”
To see the full discussion on utilities, with Sanchez on the fundamentals and Wald on the technicals, watch the above video.