One of the hottest trades of the year is about to come undone

Here's a big market mystery: Why are utilities at record highs even as interest rates climb?

Since October 15, when the market's selloff ended, the ETF tracking the utilities sector (trading under the ticker symbol XLU) is up 6 percent. Its underlying index, the S&P 500's utilities sector traded at all-time highs on Wednesday, as did the Dow Jones Utilities Average.

During that same time period, the yield on the U.S. Treasury 10-year note went to 2.34 percent, from 2.09 percent.

Why is that strange?

It's because utilities are a defensive sector that pays a steady dividend. In the case of the S&P 500's utilities sector, that dividend yields 3.4 percent. Since investors look at utilities stocks the same way they look at bonds, one would expect their prices to fall as interest rates rise but that hasn't been the case recently.

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The fact that both are rising together has some nervous.

"This is a short-term anomaly that will play out," said Chad Morganlander, portfolio manager at Stifel Nicolaus' Washington Crossing Advisors.

And by "play out," Morganlander means he anticipates interest rates to rise and the utilities sector to fall in the months ahead.

The technicals are also negative on the utilities sector's prospects, according to the chart work on the XLU done by Steven Pytlar, chief equity strategist at Prime Executions.

(Watch: Dow, S&P 500 rise to record finishes; Nasdaq slides)

"It doesn't look too promising in the very near term,"Pytlar said. "It's now overbought."

He sees the XLU as trading in a well-defined upward-sloping trend channel for the last five years. But with the October rebound, the ETF has broken above the channel.

"Every time we see a test of this upper bound, it tends to suggest that selling pressure should pick up," Pytlarwarns. "That's what we would be looking for in the near term. We would be looking for some neutral – or in fact maybe downside – price action and would not be buyers at these levels."

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