This sounds like good news for stocks--but it isn’t

The Dow Jones Utility Average hit a record high on Wednesday. But is that a reason for investors to cheer, or a cause for concern?

While the rest of themarket has been clawing its way back from a swift and brutal selloff, the utilities index broke above its previous intraday high of 576.98. With a year-to-date return of 17.2 percent, it is the best-performing major index in the U.S. market. However, the rally in utilities may not be a sign that the rest of the market is turning around.

Utilities are traditionally high-dividend payers, making them defensive plays for when things go wrong in the market. The Dow Utilities Average has a 3.44 percent dividend yield while the S&P 500's utilities sector boasts a 3.56 percent yield. Both of those yield more than 1 percentage point above their respective broad market sibling indexes as well as the benchmark U.S. Treasury 10-year bond.

Investors may be looking to keep their money safe inutilities and collect a few bucks in dividends until uncertainty dies down. The fact that utilities are rising, then, may be a bad sign about the degree of risk investors believe is inherent in the rest of the market.

But focusing on the utilities index itself, a natural question emerges at all-time highs: Is the sector currently overbought?

That may indeed be the case according to Erin Gibbs, equity chief investment officer at S&P Capital IQ Global Markets Intelligence. She said the utilities sector may be overvalued.

"The earnings growth for the next 12 months in the sector is only 2.5 percent versus 9.4 percent for broader the S&P 500," Gibbs pointed out, and yet utilities are trading at 16.2 times its forward earnings while the S&P 500 index is trading at 15.9 times forward earnings. In other words, investors are paying more for dividends than for growth in the overall market.

"I'd say the broader index looks to be a much more attractive investment," said Gibbs, who is responsible for over $13 billion in assets under advisory. "Utilities look a little peak-ish."

But there's another, more technical reason why Gibbs is wary of utilities, particularly when it comes to the ETF tracking the sector (trading under the ticker symbol XLU). She notes that short interest in the ETF was recently near 65 percent of shares outstanding. When that happens, "you typically get a couple of more weeks of upward price momentum and then it starts dropping down," she said.

However, other technical indicators for the XLU could paint a more optimistic picture.

Richard Ross, global technical strategist at Auerbach Grayson, sees a bullish ascending triangle in the year-to-date chart of the XLU. And in the ETF's longer-term chart, he says there is evidence it could potentially move higher.

Since 2010, the XLU has generally traded above its 100-week moving average, along what Ross sees as a well-defined trend channel. However, it is hitting resistance at its 2007 peak near the $45 level. (Unlike the Dow Utilities Sector, the XLU has not quite hit an all-time high.)

"Were the utilities [XLU] to break out above that 2007 high – which we're bumping up against right now – that would really put us in uncharted territory and set the stage for another leg higher," said Ross, a "Talking Numbers" contributor. "However, absent that sort of breakout, we remain vulnerable--given how extended we are here in the short-term."

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