As with other defensive sectors and safe assets, Utilities (XLU) has been on a tear all year with a 22.2% gain. The sector has been in a strong long term uptrend for some time now with the most recent leg higher bringing it to extremely overbought levels. XLU now sits over 3 standard deviations above its 50-DMA thanks to yesterday’s 1.77% rally. In the past year, there have only been four other days with larger single-day gains: June 5th, May 10th, and January 31st of this year, and October 24th of last year. Only the occurrence in June also coincided with XLU moving over 3 standard deviations above its 50-day in the surrounding days.
Since the Utilities Sector ETF first began trading in 1999, it has been rare to see XLU trade over 3 standard deviations above its 50-DMA. In fact, of all trading days that the ETF has been on the market, only 36 have seen XLU close at this extreme of overbought levels. Utilities do not stay this extended for long. The longest streak that where XLU has remained this overbought was 9 trading days in 2017; a majority of the time it only lasts for a single day.
Although it can be reasoned that extremely overbought levels would lead to some degree of downside mean reversion, historically that has not necessarily been the case. As shown in the table below, performance following periods where the ETF closed over 3 standard deviations above its 50-DMA after having not done so for 80 days have actually generally held a positive bias. Only in the following week has XLU averaged a decline, but median performance is positive with a 45 bps gain. Returns are consistently positive one month, three months, and half a year later. For both three and six months out, there has only been one occurrence each that XLU was not higher. Six months later has been the strongest of these time periods, averaging a 7.63% gain. One year later, while still positive on average with multiple occurrences of double-digit returns, XLU has only been higher 60% of the time. Start a two-week free trial to Bespoke Institutional to access our interactive Security Analysis tool and much more.