Worst-performing utility sector's bounce may not last

Another relief rally: Trader

The year's worst-performing sector is suddenly staging a bit of a turnaround.

The utilities sector, which has fallen more than 9 percent this year, has managed to find nearly 2 percent of upside in the past week. But some traders aren't holding their breath for further gains.

Craig Johnson, head of technical analysis with Piper Jaffray, calls the turnabout "nothing more than another relief rally."

Examining the chart below of the SPDR utilities sector ETF (XLU), Johnson notes that the 200-day and 50-day moving averages are both in decline, with the shorter-term smoothing mechanism recently falling below the longer-term one. Johnson calls that a "negative sign" of increasing momentum to the downside.

"We'd use this relief rally to reduce positions," Johnson said.

Stacey Gilbert, head of derivate strategy with Susquehanna, says fund flows tell a similar story.

"On the ETF side, it is the number one U.S. sector in outflows year to date, with $2.9 billion, or roughly a 23 percent decline in assets under management from the beginning of the year, based on outflows alone," Gilbert said. "Post-Fed, we saw some small inflows, but it felt more like a chase-the-bounce" type of development.

Then again, utilities was the best-performing sector in 2014, due to the drop in Treasury yields. If rates surprise investors once again and find further downside, utilities could excel once more.

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