When volatility in the financial markets increases many investors turn their attention to defensive sectors such as utilities. While flocking to low-growth cash-generating businesses may be the automatic reaction for many, the chart of a key exchange-traded fund that is designed to track the utilities sector is suggesting that this strategy might not be best suited for investment at this time. (For more check out: The Industry Handbook: Utilities).
Utilities Select Sector SPDR Fund
The most popular exchange-traded fund that is used by investors for gaining exposure to utility companies is the Utilities Select Sector SPDR Fund (XLU). In case you aren’t familiar, the fund is comprised of 30 holdings from industries such as electric and water utilities—to independent power and renewable electricity producers. Taking a look at the chart, you can see that the price has recently fallen below the support of its 200-day moving average and also broke below the neckline of a well-defined head-and-shoulders pattern. This bearish price action suggests that the downward momentum is likely to continue and some may even use the bearish crossover between the 50-day and 200-day moving averages as a signal of the beginning of a long-term downtrend. Active traders will likely set their target prices near $40.37, which is equal to the height of the pattern minus the entry point. (For more, see: Analyzing Chart Patterns: Head and Shoulders).
iShares Global Utilities ETF
From a global perspective, the decline in utilities is even more pronounced as evidenced by the chart of the iShares Global Utilities ETF (JXI). Notice how the resistance of the 200-day moving average prevented the price from moving higher on several occasions over the past several weeks. As suggested above, the bearish crossover between the 50-day and 200-day moving averages, also known as a death cross, will likely be used by technical traders to mark the beginning of a long-term downtrend. Given the oversold readings that are currently showing on the RSI indicator, some bearish traders may choose to wait on the sidelines in case of a bounce and try to open a position closer to $46.79 in an attempt to maximize the risk-to-reward setup. (For more, see: Global Utilities: 4 Key Industry Players).
Vanguard Utilities ETF
Another utilities-focused ETF that is worth a closer investigation is the Vanguard Utilities ETF (VPU). As you can see below, the price of the fund has been trading within a descending channel for the past several months. At this stage, bearish traders will likely keep a close eye on the lower trendline because a close below will likely trigger another wave of sell orders. From a risk management standpoint, traders will likely protect their short positions by placing stop-loss orders above the swing high of $108.38. (For more on this topic, check out: The Top 5 Utility ETFs).
The Bottom Line
The utility sector is often a favorite of investors during times of volatility and uncertainty. However, based on the charts of several key exchange traded funds designed to track the sector, it appears that this time is different. Based on the bearish chart patterns shown above there is no question that the bulls have their work cut out for them if they’d like to see the trend reverse to the upside. (For more, see: Why Utility Stocks Are No Longer A Safe Haven).