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Utilities: XLU’s Chart Indicators, Volatility, and More

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The Utilities Select Sector SPDR ETF (XLU), the representative of the top utility stocks in the country, touched a new all-time high on Friday. XLU has gained more than 18% so far this year, beating the broad market S&P 500 Index. Interestingly, XLU could continue its strong trend amid growing recession fears and an impending interest rate cut.

XLU: Chart indicators

On August 30, the XLU closed at $62.56. It was 3% and 9% above its 50-day and 200-day moving average levels, respectively. The fair premium to both support levels indicates strength in XLU. Its 50-day level close to $60.60 could act as a short-term support. The ETF broke above its 200-day level early this year and has seen strong trading since then.

XLU is currently trading close to the overbought zone with its RSI (relative strength index) of 69. An RSI level above 70 implies that the stock is in an overbought zone, and an RSI level below 30 indicates that a stock is in the oversold zone. RSI levels at the extremes indicate an imminent reversal in the stock’s direction.

XLU ETF better than individual utilities

Utilities have once again come back in focus amid broader market uncertainties. Instead of selecting each individual utility stock in search of defensives, the Utilities Select Sector SPDR ETF (XLU) could be an attractive option. This ETF eliminates a stock-specific risk, such as the risk following PG&E’s (PCG) Chapter 11 filing in January. PG&E once formed a notable portion in XLU, and its stock has fallen almost 80% since November 2018.

XLU currently yields 3%, higher than that of the broader markets and the benchmark Treasury yields. XLU’s expense ratio is 0.13%. The expense ratio reflects the amount companies charge their investors to manage the funds.

Interestingly, these defensive utilities acted as a safe haven amid broad market volatility, beating the S&P 500 over the long term. Including dividends, XLU has returned approximately 73% in the last five years while SPY has returned 61%.

Volatility

On August 30, the implied volatility of XLU was close to 11%, lower than their 15-day average volatility. In comparison, the broad market SPDR S&P 500 ETF (SPY) exhibited implied volatility of 16%. Implied volatility highlights investor anxiety, and higher volatility is generally associated with a fall in stock prices.

Top utility stocks Southern Company and NextEra Energy showed volatility close to 16%. Although they are seen as defensives, utility stocks exhibited volatility levels higher than the broader markets over the long term.

Top constituents look strong

Southern Company (SO), one of the top constituents of XLU, is the top rallied stock among utilities and is up almost 35% so far this year. Southern Company stock continues to look strong based on its simple moving average levels. SO is currently trading 3% and 12% above its 50-day and 200-day moving average levels, respectively.

The strength in SO stock is highlighted by the stock’s premium to its support levels. The levels close to $56.70 could act as crucial support for the stock in the short term.

Renewables giant NextEra Energy (NEE) stock has rallied 26% so far this year. It hit a new 52-week high last week and continues to look strong. NextEra Energy is trading 3% and 13% above its 50-day and 200-day moving average levels, respectively. Its levels close to $212.40 could act as a support for NextEra Energy stock in the short term.

NextEra Energy is one of the fastest-growing utilities among its peers. NEE has reported earnings growth approximately double the growth shown by the utilities’ average in the last decade. NEE stock has risen about 5% since its Q2 earnings in July.

Southern Company and NextEra Energy collectively form approximately 20% of the Utilities ETF (XLU).

Utility stocks are currently trading at record valuations, which could hinder their future run at least in the short term. For more information, please read Why Utility Stocks’ Upside Looks Capped from Here. However, impending interest rate cuts and deteriorating global economic growth could continue to push investors toward safe-haven utilities.

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