Here's Why The Risk vs Reward In Utilities Favors The Bears

JC Parets
April 19, 2016

Utilities have been the monster in the U.S. Stock Market this year. While some sectors, like in the metals or energy space, have bounced back from horrific downtrends, others have kind of just muddled around, like Financials for example. Utilities, on the other hand, have been an absolute beast. They've been rallying since the beginning of the year and this month hit new all-time highs. Moving forward, I think the risk vs reward in this sector favors the bears.

Here is a chart of the S&P Utilities Sector Index rallying this year to get back up towards its early 2015 highs. Meanwhile, at the new all-time highs this month, momentum, as defined by a 14-week relative strength index, put in a lower high. This bearish divergence and failure to hold on to those all-time highs should be the catalyst to send share prices in utilities tumbling in the coming months:

4-18-2016 7-27-17 PM xlu w

The risk vs reward is clean on this one. We love that. The idea here is to only be short Utes if we're below both the early 2015 highs and the uptrend line from the 2016 lows. If we're above either of those, I see no reason to be short. Target-wise I think we head down 10% back towards all that former resistance last year in the mid-40s. That's where I'd be covering tactical short positions.

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Tags: $XLU $DJU

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