Utilities
ByWell, actually utilities have not been ever really been for the widows and orphans as a conservative investment. A lot of investors have a misconception that this sector is too conservative and boring. This sector has its seasonally strong period that has produced above market returns from July 20th to October 3rd.
Generally, utilities are a bit of a hybrid sector – they are stocks but they also have an interest rate sensitivity component and hence have an element of a bond trade.
Utilities tend to do well in the late summer as investors look for a safe place to hide and they benefit from a positive bond trade that can take place at this time of year. A few months ago there was a picture of Bernanke blowing bond bubbles and suggested that investors should stay away from the long end of the bond curve because of the probability of rising rates. Long rates have since gone through the roof, as predicted. Despite this climb in rates, on a seasonal basis there can be reprieve during the summer. Please note that in the next edition of my guide, I plan on using a bond index rather than a percentage change in yields. The result will be a more accessible analysis of bond trends.
The reason that I point this trend out is that it provides a positive impetus for utilities to perform in the late summer.
The chart of the XLU ETF (Amex Select Spyder- Utilities) illustrates the success of the last three seasonal trades and illustrates three classic technical patterns.
On the technical side the utilities sector had a left shoulder (LS) and then a head (H) and then a right shoulder (RS), which then broke through the neckline in September of 2008. The reason that I point this pattern out is that after two successful seasonal trades in 2006 and 2007, investors should have noted the breakdown in 2008 and considered at least a partial reduction in the sector position when the neckline was penetrated. A head and shoulders pattern is considered to be bearish and is usually recognized by a lot of investors.
The next pattern in the graph is a failure of a bullish ascending triangle. Usually this pattern is exited with an upwards move. Not all patterns are a success. In this case the pattern failed and the sector moved lower. The most recent technical pattern is an ascending wedge, which is considered bearish. Look for this pattern to exit downside and possibly take the XLU to $25 at the start of the seasonal trade. This would be a good entry point for the sector.
