Now's a Good Time to Reduce Your Utilities 'Bill'

 | Feb 16, 2017 | 9:53 AM EST
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Many fund managers are looking for the sectors, groups and industries that are outperforming to overweight, and the ones that are underperforming to underweight. They can use various fundamental and, yes, even some technical tools, in this effort. Relative strength is one of these tools.

Relative strength has been used for several decades and there is a large body of academic research that shows it works. The process is relatively simple: you compare the price performance of the sector to the S&P 500. If the sector (or industry, group or company) is up 35%, let's say, and the S&P is up 25% over the same period, the sector is outperforming and we would probably want to overweight it in our portfolio.

The Utilities sector, represented by the Utilities Select Sector SPDR ETF (XLU) , has been underperforming the broad market for several months. Let's take a look at the charts and see what we want to do with our positions.

In this one-year daily chart of XLU, above, there are a number of indicators in motion. In the price chart at the top there is a solid line representing the performance of the S&P 500, which is up about 24% over the past 12 months. The XLU, the utilities ETF, kept pace with the broad market until July and then it has underperformed; it is now up around 7% over the same period. Disappointing.

Utilities have moved up from their November low but not to the extent the broad market has soared. From the November low, volume has slowed, which is not what chart watchers want to see as it suggests waning bullish enthusiasm. The daily On-Balance-Volume (OBV) line has slowly inched up from its November valley and tells us that buyers of the XLU have not been aggressive.

In the lower panel is the 12-day momentum study, which shows a bearish divergence between December and February as momentum has slowed while prices made higher highs. A bearish divergence is a "heads up" that a rally is losing its "umph" and a correction is possible.

In this three-year weekly chart of XLU, above, we can see that prices have been testing the underside of the flat 40-week moving average line. XLU could close above the average line but with the slope being flat that is not a strong buy signal. The OBV line on this timeframe has a slight uptrend the past three months, suggesting some confirmation of the rise from November.

The Moving Average Convergence Divergence (MACD) oscillator is below the zero line and could be poised to narrow to a fresh sell signal after a cove shorts signal in late December.

Bottom line: Do you own some utilities? This could be a good time to go through the charts and see if any of your holdings should be trimmed.

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