One S&P 500 sector is enjoying a stealth rally to records

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One S&P 500 sector enjoying a stealth rally to records

There's been a surprising winner as markets have rallied to records — the utilities sector.

The XLU utilities ETF is up 3% this week, nearly double the gain on the S&P 500, and the top performer on markets.

Todd Gordon, founder of TradingAnalysis.com, sees signs its outperformance can continue.

"The story begins, I think, with yields, no surprise here. We've seen U.S. bond yields drop," Gordon said on CNBC's "Trading Nation" on Thursday. "We're moving lower here in the 10-year yield following a very clear correlation of declining yields and strong utilities. We're seeing the XLU … break to new highs so obviously that's a very strong indicator."

Bond yields and high-dividend sectors such as utilities move inversely — investors hunt for alternative sources of yield in defensive trades such as utilities and real estate investment trusts.

"Sometimes I've seen these sectors kind of lead the underlying bond market, which is very strange, so perhaps utilities are signaling that we might see lower yields to come," Gordon added.

Gina Sanchez, CEO of Chantico Global, says utilities could still outperform despite sky-high multiples.

"We have utilities at really high multiples — I mean, utilities are regulated, they're slow growers, they're great payers, they're not supposed to be at multiples of 21 times," Sanchez said during the same segment. "And yet that's where they are, and yet their dividends are still almost 3%, they're still the third-highest-paying dividend sector in the S&P."

While the utilities sector yields 3%, the 10-year holds at 1.8%. The other high-dividend sectors are REITs and energy.

"That basically tells you that there's actually still going to be some capital that will be attracted to that dividend, especially, to Todd's point, if rates continue to go low and it will drive investors into high-dividend sectors," said Sanchez.

Gordon adds that American Electric Power and Dominion Energy look like two good candidates to get exposure to the sector. AEP is up 4% this week, while Dominion has climbed more than 1%.

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