XLU to Outperfom Broad market valuations are stretched beyond the historical averages, growth and cyclical technicals are in overbought conditions on many time frames, in addition key economic indicators are turning down as it appears we are mid cycle transitioning into phase 3 of the business cycle where we tend to see defensives, bonds and the Dollar outperform as the yield curve flattens. Yields are pushing lower as market participants price in a Fed policy error as tapering begins this month.
From a technical perspective, XLU is trading near its key moves averages which are stacked at $66, XLU put in short term double bottom at $63.50 back in early October and is currently in a bull flag formation, I expect continuation to the upside as market participants seek protection and yield. In addition, XLU/SPX is trading at a key support in a falling wedge signaling outpeformance in the near term.
Profit Target 1: 71 (previous all time highs)
Profit Target 2: 78
Utilities tend to move parabolic before a broad market decline. $78 target would be a blow off top scenario.
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