Utilities and Staples: One of these Defensive Sectors is Not Like the Other

May 28, 2013: 2:01 PM CST

Despite being Defensive Sectors that normally trade together, the Utilities (XLU) and Consumer Staples (XLP) Sectors have diverged sharply in May, resulting in a breakdown in one and another near-break to record highs in the other.

Let’s take a look at these two Defensive Sectors and highlight what went wrong where.

First, the featured XLU Utilities breakdown:

The Utilities Sector – shown with the XLU Sector SPDR as a proxy – closed at record highs on negative momentum and volume divergences on April 30, 2013.

Since then, the ETF has fallen over 7.5% from the peak with two sharp sell-impulse swings to the downside.

In the process, volume increased on the sell-swings and price has broken and now closed under the rising 20 and 50 day EMAs and price appears headed toward the lower target of the rising 200 day SMA into $36.75.

Taken together, these recent signals suggest the potential for additional selling ahead.

The Utilities Sector’s related defensive cousins – Health Care (XLV) and Consumer Staples (XLP) – have seen none of the dramatic selling, spike in volume, or breakdowns of rising daily key support levels when compared to the Utilities.

In fact, a quick glance at the defensive Consumer Staples Sector (XLP) shows a near-break to all-time highs today:

We see a persistent uptrend with steadily increasing volume and momentum as money continues to flow into the broader market, including the Consumer Staples sector.

A direct comparison of the Utilities and Consumer Staples provides a better picture of the departure in trend:

While these Defensive Sectors (and leading stocks in these sectors) tend to travel together as a pack, sometimes divergences occur which call our attention to the chart.

Though Utilities peaked in late April, Staples continued trending to new highs while Utilities broke the trend with a short-term reversal swing that continued throughout May.

The catalyst is a renewed focus on the future of interest rates along with the recent bullish rally in Treasury Yields throughout the month of May.

We saw last week in Chairman Ben Bernanke’s testimony that the Federal Reserve is debating exit strategies to their ongoing QE3 (Quantitative Easing/Bond Buying) stimulus program; the end-result would almost certainly be a rise in yields/interest rates in the Treasury and lending markets.

Utility companies (examples include Duke Energy – DUK, The Southern Company – SO, and Dominion Resources – D, all of which show similar Daily Chart pictures as the XLU ETF) tend to be sensitive to changes in interest rates due the capital-intensive nature of the sector.

When investors perceive a future where interest rates will be higher than they are currently, they tend to sell shares of their Utilities sector defensive holdings which can create a ‘feedback loop’ or ongoing event where traders and investors collectively move money out of the defensive sector ahead of a perceived increase in future interest rates, resulting in the type of price breakdowns we see currently.

The other Defensive Sectors (Health Care and Consumer Staples) are not as sensitive to increases in interest rates (they are not as capital/loan intensive, nor are their dividend yields as high) as Utilities and we have not seen the sudden selling pressure affect these defensive names.

Nevertheless, while we do group Sectors broadly in terms of “Aggressive/Offensive” (like Technology, Finance, Consumer Discretionary) and “Defensive/Protective,” outside factors can quickly affect companies in these broader groups of the same classification, as is the case currently with the breakdown in defensive Utilities relative to the ongoing strength in similarly defensive Staples and Health Care.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).

9 Comments

9 Responses to “Utilities and Staples: One of these Defensive Sectors is Not Like the Other”

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    […] Utilities And Staples: One Of These Defensive Sectors Is Not Like The Other at Afraid To Trade In this insightful piece, Corey Rosenbloom gives us his analysis of the utilities and consumer staples sectors, highlighting recent trends seen in the Utilities Select Sector SPDR ETF  (XLU, A) and the Consumer Staples Select Sector SPDR ETF (XLP, A+). […]

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    […] Utilities And Staples: One Of These Defensive Sectors Is Not Like The Other at Afraid To Trade In this insightful piece, Corey Rosenbloom gives us his analysis of the utilities and consumer staples sectors, highlighting recent trends seen in the Utilities Select Sector SPDR ETF  (XLU, A) and the Consumer Staples Select Sector SPDR ETF (XLP, A+). […]

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