XLU Utilities Sector SPDR June Outlook—Slowing market and economic momentum has triggered rotation into Utilities
Price Action & Performance
The XLU has traced out a classic bullish reversal since bottoming in early February of 2024. Since then, we’ve seen a broad-based improvement in the sector with 4 out of 5 of the GICS Industries outperforming the S&P 500 during May. Momentum oscillators have registered sustained overbought conditions in May which is typical of longer-term bullish trend change. Min vol. sectors like Utilities don’t usually sustain outperformance in bull markets, but the constant risk of recession due to the Fed’s inflation concerns (out line in the next paragraph) will likely help. With the consumer stalling out, investors are beginning to consider positioning for a slow-down. Utilities stocks were deeply oversold heading into 2024 setting up the potential for more outperformance on the back of their initial turn-around.
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”. April saw Utilities continue to work despite the broad market moving higher. And typically, they do well when volatility is expected to increase. With the VIX hitting very low levels recently and softer economic data coming in, there stability of the Utilities sector likely remains attractive to investors
How Can XLU Help?
XLU offers a great portfolio tool for downside protection. Among the highest dividend yields of any S&P GICS sector, the XLU offers low volatility with solid yield and a capital appreciation opportunity. It’s stability means it is often sought after by investors when the VIX is rising, or, in periods like today when the VIX is very low, but investors have some reason to be nervous. As a high dividend sector, it gets the “bond proxy” label very often, and historically outperforms when yields move lower, and income focused investors are forced to reach for yield.
In Conclusion
XLU has been a structural laggard since the bull market trend’s inception in early 2023. But 2024 has been a different story, with the Sector tracing out a textbook bullish reversal and now among the YTD leaders vs. the broad market. Our Elev8 Sector Model debuts recommending an OVERWEIGHT allocation to XLU of +1.52%
Chart | XLU Technicals
- XLU (200-day m.a. | Relative to S&P 500)
- XLU has followed through on its recent bullish reversal above near-term resistance in both absolute and relative terms and now looks to break-out of a longer-term base pattern on a move above $77
