“It isn’t random that utilities are acting fairly well.”
Carter Braxton Worth, CNBC Fast Money, September 8, 2022.
There is truly nowhere left to hide in this stock market! One of the last “safe haven” investments, the Utilities Select Sector SPDR Fund (XLU), hit an all-time closing high exactly one month ago and today completed a plunge into a bear thanks to a 3.3% sell-off on the day. In just 4 weeks, XLU is down 21.2% from its all-time high as this safety trade blew up in a hurry. This reversal of fortunes has come as a resolutely hawkish Federal Reserve has lorded over a steady increase in long-term rates. For example, the iShares 20+ Year Treasury Bond ETF (TLT) sliced through its low for the year on September 6th (lower prices equal higher rates). These higher rates make stocks look less attractive, including the relatively high yields found with XLU.
The XLU blow-up generated comparisons to previous sell-offs. From Marketwatch (hat tip to TradingTurret):
“The utilities sector tumbled into a bear market Wednesday, extending a historically steep selloff for stocks traditionally seen as a defensive haven…Analysts at Bespoke Investment Group noted that such steep declines for the sector are quite rare, with one-month ‘crashes’ of 20% or more occurring only in March 2020, October 2008, late 2002, and the 1930s.”
So this historic end to a safety trade makes the extreme of the current oversold period even more extreme. (Note that the last sell-off in XLU generated a 15.7% loss from a previous all-time high. The resulting June low successfully tested the February low in picture-perfect fashion). I am inclined interpret this historic plunge as a foreboding signal of worse news to come. After all, how could the collapse of a safety trade be anything but foreboding? Yet, given the correlation with major stock market bottoms and bottoming processes, I have to take pause.
Speaking of history, when master technician Carter Worth made his untimely call for an XLU breakout (the breakout came two days later and lasted for one day), he noted how the utility sector matched the S&P 500 (SPY) in total returns over the last 25 years. This bear market means XLU must play catch-up all over again.
Be careful out there!
Full disclosure: short SPY put spread and put