Utility Sector Momentum Stands Alone

60% of utility stocks become "overbought"

Below is one of the many charts from this week’s Thrasher Analytics letter that was sent to subscribers on Sunday.

The utilities sector is highly sensitive to interest rates, and we recently saw XLU start to lead as the market recovered after bottoming on April 16 and the 10-yr Treasury yield hit 4.66%. The yield inched slightly higher but mostly been moving lower during this period of XLU strength. At this point, utilities are one of the only sectors seeing a big move in stocks with stretched momentum, a unique development we don’t see very often.

Below is a look at the percent of each sector that is “overbought” based on a 14-day RSI rising above70. Nearly all sectors are between 0% and 14% except for one. Utilities stands out like a sore thumb at 46.7% at Friday’s close. It would be one thing if we saw a general consensus among sectors of elevated momentum in individual stocks, but when one sector stands alone, it’s at a higher risk of reversing as flows shift to less stretched corners of the market.

Looking closer at the momentum breadth data for the utilities sector, below is the percent of XLU that is “overbought” or “oversold.” On Thursday, 60% of the sector had its RSI rise above 70, becoming “overbought.” When we breach 50%, XLU has soon begun to struggle to continue to advance and often reverses lower, as shown by the red dots are the chart below.

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