Price Action & Performance
The XLU had a very strong rally from March through May. It retraced to oversold conditions during the month of June and has resumed its intermediate term uptrend catalyzed by rotation away from Growth and into Value and from XLK and XLC into the other 9 sector SPDR’s. Breadth measures have firmed up for the sector with 100% of constituents now trading above their 200-day moving average and 83% above the 50-day. Oscillator work on the RSI registered a bullish overbought signal in May and is now showing the expected follow-through after a time out in June. The MACD study has also turned positive along with industry level relative strength in 4 of 5 industries within the sector. The sector will also likely benefit as the calendar switches to the weakest seasonal period of the year historically from August through the first half of October.
Economic and Policy Drivers
Since inflation emerged as the Fed’s most prominent threat, markets have been caught in a feedback loop comprising “a strong underlying economy à manifestation of marginal inflation à Fed talk of policy tightening à corrective action as investors contemplate a higher probability of recession/late cycle which discounts the market in the near-term à investors start to see opportunity and start bidding higher again”. There is evidence that the loop is now changing as inflation has continued to be stable and economic drivers of inflation like low unemployment, high wages and high input prices have weakened or changed the trend entirely. This has led to more discounting of dovish policy in the 2nd half of 2024. A switch to dovish policy expectations has been invigorating all laggard sectors in the near-term including XLU. As election season emerges as a driver of markets, increased policy and outcome uncertainty will likely benefit min vol. sectors like Utilities in the near term.
In Conclusion
Rotation away from Mega Cap. Growth has benefited every Sector except XLC and XLK in the near term. XLU is likely to be useful in August as increasing uncertainty around the election may cause continued rotation and/or correction in the equities. Our Elev8 Sector Model continues with an OVERWEIGHT allocation to XLU of +2.11% above the benchmark S&P 500.
Chart | XLU Technicals
- XLU (200-day m.a. | 12, 26, 9 MACD | Relative to S&P 500)
- XLU executed a bullish pivot on the relative curve from a higher low at the end of June
Data sourced from Bloomberg
