US Sector Forecast- Utilities Trade Sideways as Treasury Yields Rise

The utility sector is trading sideways. After hitting an all-time high in early 2020, the sector could not recapture the all-time highs in November. Prices have been consolidating and trading in a very tight range. The upward movement in U.S. treasury yields is weighing on the utility sector. Historically, the utility sector has benefited as yields decline as the dividends received from utility companies are more attractive as yields move lower. Usually, the utility sector experienced mixed returns in February. With the Federal Reserve likely to keep rates unchanged for the foreseeable future, and Treasury yields rising, the SIXU is likely to remain rangebound.

Yields Rise Weighing on the Utility Sector

The substantial gains in the equity markets have pushed treasury yields higher. The increases in Treasury yields have made utility shares less attractive as the dividend provided by utilities has declined relative to Treasury yields backed by the full faith of the U.S. government.

Seasonality

Historically, the performance of the utility sector in February has been mixed. Over the past decade, the SIXU has increased 70% of the time for an average gain of 0.2%. During the past 5-years the SIXU has declined 60% of the time for an average loss of 0.3%.

Technical Analysis

The SIXU is trading sideways and consolidating in a tight range. The range has been getting tighter since November when the SIXU hit an 8-month high. Support on the index is seen near the 10-day moving average at 636 and then an upward sloping trend line that comes in near 627. Resistance is seen near a downward sloping trend line at 645. The historical volatility in the SIXU is near the lowest levels in more than 12-months. The Bollinger bandwidth, which measures the Bollinger band high minus the Bollinger band low, is a proxy for historical volatility. This means that energy is likely building as the price of the SIXU moves sideways.

Short-term momentum has turned negative as the fast stochastic generated a crossover sell signal in the middle of the neutral range. The value of the fast stochastic likely means that the crossover shows that momentum is flip-flopping.

Medium-term momentum is also flat. The MACD (moving average convergence divergence) histogram is printing in positive territory with a neutral trajectory, which points to further consolidation. The RSI is also in the middle of the neutral range, which also points to further consolidation.

The Bottom Line

The movement of the SIXU will likely continue unless yields break out further. This scenario could lead to a breakdown in the SIXU below support. The Federal Reserve has said they will keep rates low for the foreseeable future, and the White House is poised to move forward with a more aggressive fiscal stimulus policy. With volatility at historically low levels, there is the opportunity for the SIXU to break out, but give the accommodative policy for short-term rates and the rising bond yields, prices are more likely to remain rangebound.