Technician’s Edge: Sector Return Model YTD Shows Strange Utility Behavior

Feb 11, 2010: 3:27 PM CST

Today’s “Technician’s Edge” post at GreenFaucet.com is entitled “Sector Return Model Year-to-Date Shows Strange Behavior in Utilities XLU,” which not only looks at the 2010 returns so far from the Sector Rotation Model, but at the current daily chart of the XLU Utilities Sector SPDR.

Here is a chart of the current Year-to-Date Sector Returns Model:

I explain the importance of the “Offensive” and “Defensive” sectors in the full article.

The main idea is that the S&P 500 has lost 4.2% since 2010 began, and we would expect some of the Offensive (aggressive) sectors (consumer staples, technology, materials, etc) to decline more than the S&P 500 during a market retracement, while we would expect the Defensive sectors – Health Care, Utilities, and Staples – to decline less than the S&P 500.

That’s part of understanding the Sector Rotation model and setting expectations accordingly.

All is well with the model until you look at Utilities, which fell 7.3% since the year began.

That deserves a closer look:

We see the peak on a spike doji on December 15, 2009, almost a full month before the S&P 500 peaked.

We then observe a 10% decline to test the 200 day SMA at $28.50, along with hammer/bullish candles forming at that level, in addition to the critical $28.00 prior support level.

The volume decline during this pullback is often associated with a bullish retracement.

Buyers could support at this level, though I think the chart deserves more scrutiny.

We’ll keep watching this, along with other insights from the model.

Corey Rosenbloom, CMT
Afraid to Trade

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

5 Comments

5 Responses to “Technician’s Edge: Sector Return Model YTD Shows Strange Utility Behavior”

  1. JeffreyLin Says:

    Helene meisler master technician on RealMoney.com always looks at $xlu & relative performance to $spy – utils may be boring to trade but their performance has big implications for economy & forward markets

  2. Corey Rosenbloom, CMT Says:

    Hey Jeffrey!

    Good point! I'm one of the guilty ones who often overlooks the utilities and sparsely does analysis on them. They're great for dividends over the long haul, but they're not very volatile (good for investors; bad for traders).

    But you're right – these do give us clues about the health of the economy, interest rate expectations, and the like.

  3. Friday links: debt levels matter Abnormal Returns Says:

    […] Why is a defensive sector like the utilities down so much YTD?  (Afraid to Trade) […]

  4. benjamstev Says:

    The underperformance of XLU in 2010 is simply the reversal of the run-up that occured in December when Bill Gross said buy utilities for their dividends.

  5. benjamstev Says:

    The underperformance of XLU in 2010 is simply the reversal of the run-up that occured in December when Bill Gross said buy utilities for their dividends.