A Case for Utilities
Since peaking in February Utilities have been one of the worst performing sectors in the equity markets; at one point down over 17% at the lows. There is a good bit of this that is tied to the fear rising rates coming sooner than later. This has been one of the big clouds over most interest rate sensitive areas so far this year. Most know I am in the camp of “lower longer” when it comes to the FED which would mean the year to date action in these areas could turn out to be a bit of an overreaction.
There are quite a few ifs that are necessary for this idea to play out, but we are already basing and a potential breakout in $TLT last week which makes me think it might start leaking over into these other sectors. Real Estate and Utilities are two good places to look. Let’s start with Utilities using $XLU as our proxy.
From a Relative Strength Perspective the sector remains a laggard, but has began to come off the lows in recent weeks.
The sector has been mostly ignored in recent action, but when I was looking this weekend the dual view RSI chart caught my attention.
Quickly, the two major trendlines jumped out. On the weekly, the sector bottomed right at a 3+ year longterm trendline and reversed. That trend line also happened to converge with a long term horizontal level as well (not marked). Then glancing over to the daily we can see that surge off the lows initiated a break of the daily trendline. Shortly after testing that line again produced another bounce couldn’t withstand the broad market pressure leading to another even deeper trendline backtest which also corresponds with the 61.8% fibonacci retracement off the recent lows. Friday’s doji right on that backtest hints we could see a change in direction near here. If that were to happen it could be forming the right shoulder of a bullish Inverse Head and Shoulders pattern. Switching views let’s see how other indicators are shaping up..
Here the weekly chart is still in a rough spot below the middle Bollinger Band and potentially building a bearish flag, but the large MACD Histogram divergence also stands out if some positive price action materializes. On the Daily here we can see the middle Bollinger Band has turned up even though price closed the week below it. A remounting of this average would be a solid sign for more and further building that right shoulder.
One last chart I wanted to view was the Weekly moving average chart with OBV (On Balance Volume) to show how the participation has been during this pullback.
The OBV indicator shows participation in a long term uptrend and also breaking the short term down trend on the recent move off the lows. We also see all the long term moving averages are still steadily rising and the 100sma is currently providing some support as it has many times previously during this uptrend.
To be sure, this scenario is still very early in its development and could fail to materialize at all, but there are some signs of life worth paying attention to. For those who want to get in early, they can buy on a reversal candle and put a stop below the recent lows for a less than 4% risk. A more conservative play would be to wait for the Inverse Head and Shoulder pattern to break and then use a close below the right shoulder as a stop. Either way you have well defined levels to work with which is the key to a good trading plan. I think things are starting to align for some improvement and for those inclined you can enjoy the 3.7% yield while you are waiting. There are various ETFs you can play the sector with, I chose $XLU for my example as it is one of the largest and most liquid in the space.
Now I know some don’t like ETFs and would rather play the strongest names in the sector on any improvement. That is fine. below you will find my relative strength lists with FINVIZ links for the sector to help you in that search. Don’t get stuck on the long list of the whole sector, once you find out where you want to fish, the subsector lists will likely provide more value.
Utilities Subsectors
Utilities Relative Strength
Diversifed
Electric
Gas
Water
On top of the interest rate sensitive nature of Utilities, they are also considered a defensive sector by all measures; and could also be a decent place to park some money if we do fall into a correction sometime this fall as many believe we will. I am not fully in that camp right here, but it certainly doesn’t hurt to have some defensive ideas in the playbook, especially ones that look to be setting up for a move as well.
Good Luck and I hope this helps!
