Why You Should Avoid One of the Market's Worst Sectors

Editor's note: Utility companies are often considered "safe haven" investments. But according to Vic Lederman – the editorial director of our corporate affiliate Chaikin Analytics – this isn't a space you want to own today. In this piece, published earlier this week in the free Chaikin PowerFeed e-letter, Vic uses one financial tool to highlight the weakness in this sector... and explains why you should look elsewhere for a defensive play.

One of the top-level market sectors is in trouble this year...

I'm talking about utilities.

At Chaikin Analytics, our Power Gauge system allows us to track this sector (and many others). This tool helps gather investment fundamentals, technicals, and more into a simple rating.

And put simply, it's not going well for this basket of stocks...

The Utilities Select Sector SPDR Fund (XLU) has lost about 1% since the start of the year. On the other hand, the broad market S&P 500 Index has soared nearly 8%. And the tech-heavy Nasdaq Composite Index is up more than 8%.

That makes XLU one of the worst-performing sector in the Power Gauge. But the struggle in utilities is no surprise.

Today, I'll take a closer look at why that is – and explain what our system sees ahead for XLU...

The stock market is in "risk on" mode. That trend has been in place for months. And it's one of the big reasons why utilities have lost their appeal as traditional safe-haven investments.

As Chaikin Analytics founder Marc Chaikin wrote in Chaikin PowerFeed last June...

For months, we've pointed out that the market was tilting away from traditionally defensive plays like utilities. And as a new bull market gets underway, this reality is unavoidable...

The markets are running headlong into tech and growth-oriented stocks. And once-reasonable defensive plays are now a portfolio graveyard.

I've followed XLU's performance for months now, too. When I wrote about the company last September, the fund was doing terribly. Up to that point, it was down about 13% in 2023 and was down roughly 20% over the previous year.

XLU has continued to struggle since then. We can see that using the Chaikin Power Bar.

The Power Bar ratio is a "quick glance" tool...

It breaks down all the stocks with Power Gauge rankings within an exchange-traded fund ("ETF"). They're color-coded as "bullish" or better (green), "neutral" (yellow), or "bearish" or worse (red). And with just a glance, we can get our system's overall take on an ETF.

In XLU's case, the outlook is poor right now. Take a look at this screenshot from the Power Gauge...

As you can see, XLU has an overall "bearish" Power Gauge rating right now. It only features five stocks with a "bullish" or better rating. And nine stocks in the ETF earn "bearish" or worse grades.

Back in September, XLU only had one stock with a "bullish" rating and 22 stocks with "bearish" or worse grades. That means today's numbers are a slight improvement, but this isn't enough to move the sector out of "bearish" territory.

Right now, the utilities sector is still one of the worst-ranked in the Power Gauge. Based on the Power Bar ratio, XLU ranks ninth out of 11 sectors.

Fortunately, the "bearish" turn was as clear as it gets in the Power Gauge. Check it out...

As you can see, XLU was choppy but strong through most of 2022. It also held a "bullish" rating for most of the year.

But in late 2022, something changed. The sector stumbled.

It switched from outperforming the broad market to underperforming it. And the Power Gauge quickly flashed "neutral"... and then "bearish."

Since then – and through most of 2023 – XLU has held a "bearish" rating. And 2024 isn't looking any better...

XLU has maintained its "bearish" rating since early this year.

The rating in the Power Gauge is still clear... Utilities are not the defensive play you're looking for right now.

Good investing,

Vic Lederman

Editor's note: Marc Chaikin uses his Power Gauge system to spot more than just potential traps in the market. In fact, he recently sat down to share how he's currently using this tool to navigate the 2024 election year...

In his urgent update, Marc details how his Power Gauge system has pinpointed the No. 1 stock to buy ahead of the presidential election. Plus, he shares the name of one popular stock that you should sell immediately. To get the full story, watch a replay of the event here.

Further Reading

Without semiconductors, much of the modern world would grind to a halt. That makes for a strong investment setup – and right now, the Power Gauge is incredibly bullish on this opportunity. Here's one way to take advantage of the trend... Read more here.

One social media giant has taken steps to limit political posts on its website. This bold decision could have major implications for its business. But according to one financial tool, this move won't hurt the company's stock – even during an election year... Learn more here.