- It appears the bond sell-off has stabilized for now.
- Utilities continue to underperform other sectors.
- XLU continues to consolidate after the sharp sell-off that started in mid-December.
The best news for the utility sector is that the recent increase in interest rates may be topping out.
The 10-year yield continues to hover around 2.9%. On Friday, I thought the employment report would lead the market to conclude that four rate hikes were now possible, which would lead to a broader bond market sell-off. While the possibility of four hikes has increased, 10-year yields have remained calm.
In fact, the yield curve has come in slightly this week:
And corporate yields have also stabilized a bit:
The Baa area of the market widened a bit this week, but the move was small compared to the recent widening. The Aaa market is stable.
The utility sector remains out of favor:
It is clearly lagging compared to other sectors.
Most of the 10 largest members of XLU advanced last week:
Sempra (SRE) had the largest gain, rising 1.86% (I reviewed its latest 10-K earlier this week). Exelon (EXC) had the next strongest gain (here's a review of its latest annual report). The only two issues to move lower were Public Service Enterprise Group (PEG) and Southern Company (here's its annual review).
Let's turn to the XLUs, starting with their two-week chart:
Prices have been consolidating in a symmetrical triangle pattern. While this is frustrating for bulls, it's actually a very healthy development. The XLUs sold off sharply over the last few months. Long periods of consolidation indicate that buyers and sellers are sorting through price signals over a longer period, allowing them to "catch their breath."
On the 30-day chart, we see additional consolidation, but this time between 48.6 and 50.6. As I noted above, this is a healthy development, especially after a sell-off.
Finally, we have the daily chart:
This chart shows the depth of the sell-off that started in mid-December. On an absolute basis, prices fell about 16%, which is a large move for a conservative, income-oriented sector. Since bottoming, prices have broken through resistance but rather than rallying higher, they are consolidating their gains for now. But the rising MACD is a positive sign.
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