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ETF Sector Relative Strength Corner: Low Beta, High Yield Group Poised for 2022 Breakout

by | Dec 5, 2021

Utilities (XLU) – Defensive Utilities are a corner of the market known for relatively lower volatility and high dividend yields which can be prudent once a stock market correction starts to unfold. Lately the Staples, and Utes have maintained relative strength compared to other groups and the XLU is an easy way to establish lower risk equity exposure or adding yield to a portfolio with the dividend yield about 3%. Tie in the strong technical setup going into 2022, the XLU could be a strong outperformer into Q1 if markets remain sluggish and news driven. The monthly chart of XLU is building a coiled squeeze pattern which can resolve in a multi quarter move to new highs. As the weekly chart shows below the XLU held multiple tests of its long term yearly value area near 64 and is now flagging with potential to breakout above 70 in its two year ascending triangle being built. The group is up +7.5% year to date and tends to be more correlated with interest rates, as yields fall, it makes Utilities more attractive. XLU has stronger seasonality in January, March and April. All months up at least 7 of the last 10 years for gains over 2% each so that bodes well for a 2022 first quarter potential rally. 

The ETF’s top holdings are NEE, DUK, SO, D, EXC, AEP, SRE, XEL, PEG, AWK, ES with the first 3 names making up about 34% of the index. The best looking charts in the space within bullish uptrends are NEE, ED, PEG, EIX and AWK. Many of the safety risk-off stocks should outperform in this corrective market if we continue to see a multi week or even multi month correction in higher beta stocks and the overall market so looking for rotation into Utilities can be a nice way to avoid the volatility until things settle.

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