Utilities: A Safe Harbor?

10/23/2012 10:35 am EST


Thomas Aspray

, Professional Trader & Analyst

This sector usually has less sensitivity to major market drops than other plays, and furthermore it has shown signs of bottoming. MoneyShow's Tom Aspray evaluates the group to pinpoint the standout buys.

The sharp decline last week and follow-through selling early Monday increased the downward pressure on the market. Stock futures are down sharply early Tuesday, as the mid-October lows have been violated. Monday's late rebound was encouraging, so Tuesday's close will be important.

The stock market still needs a higher weekly close to support the view that the decline from the September highs is a correction, not the completion of a major top. Many of the sectors that have shown positive momentum over the past month are now approaching important support, which needs to hold. A close in the S&P 500 below 1,420 will set the stage for a drop to the 1,400 level.

What can those investors do as if they are not heavily invested in stocks, but are worried about the market’s decline?

A couple of weeks ago, I discussed three specific investments in the utility sector, and there are further signs that this sector has bottomed out. Here are three more yield plays to consider if the price is right.

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Chart Analysis: The daily chart of the Select Sector SPDR Utilities (XLU) made its low on September 21 at $35.91, and is up 3% from the lows. XLU currently yields 3.94% and is the most liquid utility ETF. It has a 9% holding in Southern Company and 5% in Duke Energy.

  • There is short-term support now in the $36.40 to $36.80 area.
  • The daily chart shows that the long-term uptrend (line b) was tested last month. The support in the $36.20 area (line a) goes back to 2011.

  • The relative performance or RS analysis is in a short-term uptrend (line d), but shows a pattern of higher highs and higher lows.

  • The RS line formed a similar pattern in April (line c) as the stock market was topping, which led to a sharp rally in XLU.

  • The daily OBV moved through its WMA in September, and is now in a clear uptrend (line e).

  • There is next resistance in the $37.60 to $38 area, with the highs from 2008 at $41.98.

The Wisdom Tree Global ex-US Utility Fund (DBU) is a $36 million ETF that has an average volume of 16,000 shares and currently yields 4.24%. Its top ten holdings make up just 22% of the ETF, with the largest holding at just over 2%.

  • The daily chart of DBU shows a reverse H&S bottom formation that was completed by the move through the neckline (line f).

  • This $17.50 to $17.60 area (line f) now becomes a good level of support, and to keep the bottom formation intact, DBU should not break decisively below the right shoulder at $17.05.

  • The relative performance moved through its downtrend (line g) last month.

  • The RS line has now moved above the resistance (dashed line), indicating it is acting stronger that the S&P 500.

  • The on-balance volume (OBV) plot does not help us much, as the huge volume on September was 30 times the daily average, which distorts the OBV pattern. This is a common problem with low-volume stocks or ETFs.

  • DBU has next major resistance in the $19.30 area.

NEXT: Tom's Analysis of 2 Individual Utilities


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Duke Energy (DUK) is a $46.1 billion utility company that currently yields 4.7%. The weekly chart shows long-term support in the $63 area (line a), with the March lows at $60.57.

  • The weekly RS line bottomed in September, and has been rising for the past six weeks, but is still below its WMA.

  • The RS line did confirm the highs in June, as it made slightly higher highs (line b).

  • The daily RS line (not shown) is above its WMA, and is in a clear short-term uptrend.

  • The weekly OBV tested long-term support (line c) in September, but is still slightly below its WMA.

  • There is next resistance in the $66.30 area, with stronger levels in the $68 to $69 area.

PPL (PPL) is a $2.3 billion electric utility that currently yields 4.8%. The weekly chart shows that it is now testing the weekly resistance in the $30.30 area (line d).

  • If this resistance is overcome, the next upside target is at $32.94, with further resistance at $34.41.

  • The long-term chart of the relative performance suggests a bottom is being formed (line g).

  • The downtrend in the RS line from the 2011 highs (line f) is now being tested.

  • The RS line needs to move above the recent highs to confirm that it has bottomed.

  • The weekly OBV moved to its highest level since 2008 in July, and is acting stronger than prices.

  • The OBV shows a strong uptrend (line h).

  • There is first support in the $29 to $29.40 area, with more important levels at $26.50

What it Means: Typically, when the overall market declines, utility stocks also correct, but to a lesser degree. My previous recommendation in XLU was partially filled last time, and the original position was recommended in October 2011. Those not long could still buy.

The Wisdom Tree Global ex-US Utility Fund (DBU) could add some global yield to your portfolio, but I would only buy on a pullback. Limit orders must be used.

Of the two utilities, Duke Energy (DUK) is my favorite

How to Profit: If not already long, go 50% long Select Sector SPDR Utilities (XLU) at $36.76 or better, with a stop at $34.88.

For the Wisdom Tree Global ex-US Utility Fund (DBU), go 50% long at $17.66 and 50% long at $17.48, with a stop at $16.83 (risk of approx. 4.2%).

For Duke Energy (DUK), go 50% long at $64.68 and 50% long at $64.32, with a stop at $62.33 (risk of approx. 3.4%).

For PPL (PPL), go 50% long at $29.32 and 50% long at $29.04, with a stop at $28.18 (risk of approx. 3.4%).

Portfolio Update: As per October 8, investors should be 50% long the Select Sector SPDR Utilities (XLU) at $36.64 with a stop at $34.88. The original long position was established last October at $34.59.

Investors should also be 50% long Southern Company (SO) at $45.68 with a stop at $43.48. At this time, cancel the additional buy order

I also recommended Sempra Energy (SRE), but never got a pullback to buy. Cancel the buy order now.

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