Utilities: A Seasonal Idea

02/22/2016 9:00 am EST

Focus: STOCKS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

In our Sector Seasonality studies, one sector that begins its seasonally favorable periods in March are the utilities, explains Jeffrey Hirsch, editor of Stock Trader’s Almanac.

Last year, the utilities sector started off the year on a near chart-perfect bullish climb. That trend however, only lasted until the end of January.

So far this year, utilities have been a bright spot with a solid year-to-date gain while many other sectors are currently in the red.

Perhaps utilities could be rallying because interest rates are falling and their dividends are attractive.

Or perhaps they are advancing because global growth and deflation concerns are making the sector’s highly regulated and stable revenues look like a safe place to park capital.

Most likely, utilities’ success, thus far, is a combination of these reasons and others. 

Seasonal strength typically begins following an early March bottom and usually lasts through mid-October, although the bulk of the move is typically done by early May.

Seasonal factors combined with the current trend suggest utilities still have room to run.

With a little more than $7 billion in assets and average daily trading volumes in excess of 13 million shares per day over the last three months, SPDR Utilities (XLU) is the top choice to hold during utilities’ seasonally favorable period.

It has a gross expense ratio of just 0.14% and comes with the added kicker of a 3.48% dividend yield. XLU could be bought on dips below $45.50. This is just above its monthly pivot.

Based upon its 15-year average return of 9.9% during its favorable period—mid-March to the beginning of October—an auto-sell price of $55.00 is set. If purchased, an initial stop loss of $40.95 is suggested.

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