Yesterday, I watched a webinar from the CMT Organization website. They hosted Michael Gayed, CFA. Michael was explaining about the XLU/SPY ratio and its use. Today, I decided to analyze it myself and here we go:
Typically the Utilities sector (XLU) serves as a hedge in recessionary times. This sector is made up of companies such as water, electricity, natural gas. Companies within this sector usually offer steady and consistent dividends and are less volatile relative to the general market.
The XLU:SPY ratio suggests that when it breaks out above 240-SMA, XLU tends to outperform the SPY. That is what we could call RISK-OFF. For instance, from November 2004 to December 2007, XLU (48%) outperformed SPY (26%). In December 2007, XLU broke out resistance line, but SPY did not follow the same pattern. Then, prices fell.On the other hand, when the ratio is below the 240-SMA, we call it RISK-ON.
In April 2013, the XLU:SPY ratio confirmed the break out and consolidation below 240-SMA. From April 2013 to February 2020, the SPY (108%) outperformed XLU (70%).
Currently, the ratio XLU:SPY is testing 240-SMA as a resistance. I see there is a negative divergence between XLU:SPY ratio and its RSI. In the XLU:SPY ration, I found a daily SZ that it was not tested yet. My conclusion, we may see higher numbers for the SPY in the following weeks. We need to take a look of this ratio very closely because if it breaks resistance and breaks out above the 240-SMA, and confirm its trend, we can see prices going down for the SPY.
We will see.
Typically the Utilities sector (XLU) serves as a hedge in recessionary times. This sector is made up of companies such as water, electricity, natural gas. Companies within this sector usually offer steady and consistent dividends and are less volatile relative to the general market.
The XLU:SPY ratio suggests that when it breaks out above 240-SMA, XLU tends to outperform the SPY. That is what we could call RISK-OFF. For instance, from November 2004 to December 2007, XLU (48%) outperformed SPY (26%). In December 2007, XLU broke out resistance line, but SPY did not follow the same pattern. Then, prices fell.On the other hand, when the ratio is below the 240-SMA, we call it RISK-ON.
In April 2013, the XLU:SPY ratio confirmed the break out and consolidation below 240-SMA. From April 2013 to February 2020, the SPY (108%) outperformed XLU (70%).
Currently, the ratio XLU:SPY is testing 240-SMA as a resistance. I see there is a negative divergence between XLU:SPY ratio and its RSI. In the XLU:SPY ration, I found a daily SZ that it was not tested yet. My conclusion, we may see higher numbers for the SPY in the following weeks. We need to take a look of this ratio very closely because if it breaks resistance and breaks out above the 240-SMA, and confirm its trend, we can see prices going down for the SPY.
We will see.