John Freund is a high yield specialist for Todd Shaver's BullMarket. Here, he looks at two of his cu...
Is 2014's Hot Sector Ripe for Profit Taking?
05/01/2014 10:45 am EST
Last year’s lagging sector is this year’s outperformer, and MoneyShow’s Tom Aspray takes a technical look to see whether there’s still enough juice left to propel this market leader higher.
The new closing highs in the Dow Industrials on Wednesday got most of the attention though it is still below the intra-day high of 16,631 from April 4. The Dow Transports made new all-time and closing highs last week so the Dow Theory’s positive outlook is still intact.
Equally important was the very strong A/D ratios as the NYSE Advance/Decline closed the month at another new all-time high. It continues to lead prices higher and shows no signs yet of a top. The S&P 500, and therefore the Spyder Trust (SPY), are just below last week’s highs. A weekly close above these highs will reverse the negatives from last Friday’s selling.
It has clearly been a stock picker’s market as many stocks and sectors have diverged from the S&P 500. The utility stocks have been the clear winners as the Select Sector SPDR Utility (XLU) is up 14.7% YTD, which is over double the 6.4% gain of the second best Select Sector SPDR Energy (XLE).
The best yearly gain for the XLU since 2008 was in 2011 when it was up 19.6%. Therefore, one can make the case that this sector has gotten well ahead of itself. The sector was in the news, Wednesday, when Exelon (EXC) announced before the opening that it was going to buy Pepco Holdings Inc. (POM) for $6.83 billion in cash. Holders of EXC were not happy as the stock closed down 3.2% on three times the average volume. Is this a warning sign for the sector?
Chart Analysis: The Select Sector SPDR Utility (XLU) pushed to marginal new highs, Wednesday, but closed only slightly higher. Its top ten holdings make up almost 60% of this ETF with the largest percentages of 10% in Duke Energy (DUK) and 8% in both NextEra Energy, Inc. (NEE) and Dominion Resources, Inc. (D).
- The weekly chart shows that XLU has closed higher each of past six weeks.
- It closed the month at the monthly projected pivot resistance at $43.19.
- The weekly starc+ band is at $43.80 with the quarterly projected pivot resistance at $44.78.
- At the end of January, the weekly relative performance broke its downtrend (line b).
- The RS line shows a clear uptrend, line c, and it is well above its WMA.
- The weekly OBV moved above the late-2013 high, line d, in April.
- This is clearly positive but the OBV is uncomfortably far above its rising WMA.
- May’s monthly pivot is at $42.55 with additional support in the $41.60 area.
- The quarterly pivot is at $39.96 is 7.5% below Wednesday’s close.
- The close was below the daily starc- band with the 38.2% Fibonacci retracement support from the early 2014 low at $32.60.
- The weekly starc- band and 20-week EMA are in the $32 area.
- The daily uptrend, line e, is at $31.85 with the 50% retracement support at $31.36.
- The relative performance formed a short-term negative divergence, line f, at the recent highs.
- The RS line has dropped below its WMA with long-term support at line g.
- The daily OBV moved through strong resistance in the middle of March when EXC closed at $30.64.
- The OBV did make slight new highs on Monday but has now dropped below its WMA and the uptrend, line i.
- There is initial resistance now at $35.30-$35.60.
NEXT PAGE: 2 More Utility Stocks to Watch|pagebreak|
The Southern Company (SO) makes up 7.6% of XLU and has a current yield of 4.50%. It reported earnings, Wednesday, and it beat on both earnings and revenues but expenses were also up over 10% from a year ago.
- The stock tested its starc+ band on Monday and made marginal new highs, Tuesday, at $46.27 before closing lower.
- The monthly pivot for May is at $44.75 with further support at $44.25.
- The 38.2% retracement support from the December low is at $43.50.
- The monthly projected pivot support is at $43.24 and the 50% support is at $42.65.
- Corrections after a strong rally often drop stocks into the 38.2%-50% Fibonacci support zones.
- The relative performance made a new high early in the week and is now testing its rising WMA.
- The daily on-balance volume (OBV) did make a new high before turning lower.
- It is still above both its WMA and the uptrend, line c.
- The weekly OBV (not shown) is likely to turn down this week.
- The stock made a new rally high, Wednesday, at $33.94 but then closed a bit lower for the day and just above May’s monthly pivot at $33.20.
- The monthly projected pivot support is at $32.46 with the quarterly pivot at $31.81.
- The daily starc- band is at $32.43 with the uptrend, line d, at $31.55.
- The daily relative performance did not make a new high with prices this week and has dropped back below its WMA.
- The RS line has more important support at line f and has risen less strongly than that of other utility stocks.
- The daily OBV did make a new high this week (see arrow) but dropped below its WMA as volume was double the average on Wednesday.
- The near-term uptrend is now being tested with more important support at line g.
What It Means: Though there are no confirmed sell signals in the Select Sector SPDR Utility (XLU), many of its components show a loss of upside momentum. This increases the odds of a deeper correction that could drop XLU 3% to 5% lower.
Those that have yearly-sized profits in some of the utility stocks should consider taking some profits or use a strategy that allows for pullback to longer-term support.
How to Profit: No new recommendation
Related Articles on INCOME
Welltower, Inc. (WELL) — a health care infrastructure real estate investment trust — has...
We’re doubling down on Iron Mountain (IRM), a data storage REIT; since we recommended the stoc...
Most income stocks have seen their values trimmed by rising interest rates. I can understand the fru...