Don’t bet too much on this sector’s rally: Traders

Utilities stocks have been electric, making gains for six straight days and hitting a two-month high. However, one technician says that investors shouldn't get too optimistic on the outlook.

"Utilities should be viewed as a summer rental here, let's not fall in love," Rich Ross of Evercore ISI said Friday on CNBC's "Power Lunch." "It's been constructive here in the short term, but tons of resistance comes right overhead."

According to Ross' chart, the SPDR Utilities Sector ETF (XLU) has seen a pullback this year to a key support level of $40. Although the XLU has followed an upward trend in its 150-week moving average since 2011, Ross said that could turn around quickly, as investors bet the Federal Reserve will raise rates later this year.

"As long as we continue to hold that key long-term moving average, the big trend does remain higher. But let's keep those expectations in check," Ross said.


Utilities stocks moved higher last week as the Federal Reserve made little indication during its two-day meeting that it planned to raise rates. If the central bank holds off on a rate hike, sectors with high dividend yields, such as utilities, will continue to attract investors looking for income.

Read MoreSectors to bet on if the Fed stays put

"This is representing a shift in investor sentiment. Up until now utilities have really been facing the expectation of higher yield and a Fed hike," Gina Sanchez of Chantico Global said Friday, which she said has sent money "flying out" of utilities.

The sector is down 7 percent year to date.

On Friday, economic data showed that wage growth has slowed to the lowest rate in decades, the latest in a batch of mixed numbers that has investors uncertain about economic growth. The S&P utilities sector climbed another 1 percent Friday, making it the best-performing sector last week.

"It's not painting a clear picture for a Fed hike," Sanchez said. "Investors are pushing that idea out farther, and that means that the dividend yield of utilities now looks really attractive and people are coming back in."

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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