Utilities Holding their Own

Jun 24, 2008: 9:09 AM CST

The Utilities Sector (XLU) has shown relative strength in the background of the recent market downswing, and still trades in a respective chart position.  Let’s look at its chart and its comparison to the S&P 500.

XLU – Utilities Daily Chart:

Since the March lows, price has steadily and comfortably trended upwards, and price now trades above its 20 and 50 day moving average, and the ‘moving average orientation’ is in the most bullish scenario (20 above 50 above 200).  This is an interesting development, but not one that is unexpected.

Utility stocks tend to do well in environments of low interest rates and poorer in times of relatively ‘high’ interest rates because they are required to borrow so much money to construct infrastructure and keep operations running.  Thus, they benefit from lower rates of lending.

Also, they tend to be ‘defensive’ areas for long-only investors to buy in times of economic uncertainty or market downturns, due to their high dividend rates and stable charts (you don’t see a utility stock making such wild swings like a Google or Apple or other technology stock).

One word of caution is that many are expecting the Federal Reserve to begin raising rates, probably sometime later in the year, so this could hurt these stocks which are holding up during the market downturn.

Let’s look at the chart of the comparison between the S&P 500 and the Utility Sector, including its relative strength, which has just experienced a positive trendline break.

Notice that the S&P (blue line) has slightly outperformed the XLU (red and black line) until recently, when the sector ‘held its own’ as the market fell.  This created the positive trendline break in the Relative Strength chart and could lead to further outperformance should the market continue falling.

Continue to look for safer opportunities here, but they won’t be as exciting or volatile as other positions in popular stocks that are discussed widely in the media each day.

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