Yesterday, we wrote about how the utility sector has lagged the S&P 500 significantly year-to-date. We also mentioned how we have observed unusual call buying activity in the SPDR Utility ETF (XLU). Yesterday, the call buying continued with investors focused on the December expiration buying 23,000 Dec 39 calls. They also bough September 27 weekly calls. On Monday, there was a buyer of 50,000 October 38 calls.
Only 28% of the XLU component stocks are trading above their 75-day moving average. This is the worst group amount the 10 sectors we follow. The 10-day and 21-day are substantially better and the shorter-term indicators are showing strength.
Utilities will show relative outperformance if interest rates flatten out or decline over the next several months and if there are rising doubts about the overall health of the economy. Buying XLU between now and year end may represent a way to obtain equity exposure with some downside protection.