The Dow Jones Utility Average (DJUA) has broken out above a four-year channel, defying extremely overbought technical readings while confirming market leadership following the third quarter's collapse in bond yields. This relative strength predicts continued upside in coming months, rewarding investors and market timers who have shifted assets into yield plays to lower exposure during an economic downturn.

The venerable index has risen more than 23% so far in 2019, posting stronger returns than three of the five FAANG components, highlighting a market niche that is still ignored by the majority of the trading crowd. This superior performance is likely to continue as long as trade wars, the "Fed Put," and political shenanigans dominate financial headlines, suggesting that the group can be bought aggressively until the 2020 presidential election.

SPDR Utilities ETF (XLU)

XLU
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The SPDR Utilities Select Sector ETF (XLU) has posted even stronger annual gains than the DJUA, lifting nearly 26%. It also pays an impressive 2.92% annual dividend yield, making the instrument a better investment choice than the vast majority of tech stocks and S&P 500 components. The fund has also broken out above a rising channel going back to January 2015, setting a trading floor just three points below Friday's closing print at $64.77.

The monthly stochastics oscillator crossed into a buy cycle in the oversold zone in the first quarter of 2018 and reached the overbought zone in July. It has spent the past 15 months grinding even higher, defying the forces of gravity while confirming a runaway uptrend that shows no signs of letting up. Taken together with the channel breakout, buying high in hopes of selling higher could be a winning strategy, despite the vertical trajectory.

On the flip side, a reversal in coming weeks should offer a low-risk buying opportunity when it reaches new support at the upper trendline, which is now rising through $61.50. This buy-the-dip strategy can utilize a tight stop loss below that level, establishing an impressive reward-to-risk profile for a sector fund that hasn't engaged in an intermediate correction since the last downturn ended in June 2018.

Southern Company (SO)

SO
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Of the 15 DJUA components, 12 are trading above the 50th percentile in relative strength, also highlighting impressive 2019 performance. Southern Company (SO) looks like a top pick in this regard, with the second highest relative strength and dividend yield, currently at 4.01%. This is especially impressive because the weakest components typically offer the highest dividends to attract technically oriented investors.

The monthly chart shows symmetrical and bilateral price action since the first quarter of 2015, descending from rally peaks in the low $50s to trading floors in the low $40s. The latest cycle started when the stock reached support in February 2018, testing that level for more than 10 months before turning higher at the start of 2019. However, the subsequent uptick sliced through resistance "like butter" in the second quarter, maintaining a vertical trajectory that has now posted a series of all-time highs.

This pattern is riskier to trade than the sector fund because breakout support is located 10 to 12 points above Friday's closing print. However, the rally has held above the 50-day exponential moving average (EMA) since January 2019, and that level is just two and a half points lower, supporting a relatively conservative stop loss for a buy high/sell higher trading strategy. Even so, the majority of investors may wish to wait for the next pullback to the moving average, which could come at any time.

The Bottom Line

The utility sector has led broad benchmarks through most of 2019 and has now reached overbought levels, but underlying technicals are still firing on all cylinders, predicting additional upside that could last into the fourth quarter of 2020.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.