ETF Trades: Utility Sector Nears Seasonally Favorable Time By: Christopher Mistal | February 05, 2015 | Email | Print

From the Stock Trader’s Almanac 2015, page 92, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. High-Tech sector exposure already exists in the Almanac Investor ETF Portfolio. Last year, the Utilities sector started off the year on a near chart-perfect bullish climb from the bottom left to the top right. This trend was briefly interrupted with a period of sideways trading that ran from early May through the beginning of October. Since breaking out to new highs in late-October, the sector has soared. It was one of the top-performing sectors of 2014. 

So far this year, Utilities have been a consistent bright spot with a respectable year-to-date gain compared to many other sectors that are currently in the red. Perhaps Utilities are 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 sectors highly regulated and stable revenues look like a safe place to park capital. Most likely, Utilities’ success in 2015 is a combination of these reasons and others. As can be seen in the following chart of the Utility Sector Index (UTY), seasonal strength typically begins following an early March bottom and lasts through mid-October. Seasonal factors combined with the current trend suggest the Utilities trade could be profitable still.

With over $8 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 0.15% and comes with the added kicker of a 3.09% dividend yield. XLU could be bought on dips below $46.80. This is just above projected monthly support (green-dashed line in chart below). Based upon its 15-year average return of 9.4% during its favorable period mid-March to the beginning of October, an auto-sell price of $56.32 is set. If purchased an initial stop loss of $43.31 is suggested.

Although no sector seasonalities come to an end in February, two do in March. Computer Tech’s seasonally weak period ends in the beginning of March and so does Biotech’s seasonally favorable period. There are no positions in the portfolio associated with Computer Tech weakness. However, iShares NASDAQ Biotech (IBB) is up 17% since being added to the portfolio last year at the start of Biotech’s bullish seasonality in August. In an effort to preserve this gain, and possibly benefit from further upside from now until the beginning of March, a 5% trailing stop loss is suggested for IBB. The initial starting point is IBB’s closing price from February 4. 

Last month’s new trading ideas, United States Natural Gas (UNG) and First Trust ISE-Revere Natural Gas (FCG), targeting seasonal strength in natural gas, have been added to the portfolio. UNG was down 6.4% while FCG was up 7.5% as of yesterday’s close. UNG and FCG can be considered on dips below their respective buy limits.

Last month’s Seasonal Sector Trades focused on seasonal strength in oil. United States Oil (USO) was added to the portfolio on January 23 when it traded below $17.00. This initial purchase represents one-third of a total position. Additional USO purchases can be considered on dips below $18.05. Whether or not the ultimate bottom for crude oil has been made or not is still uncertain, but recent trading action suggests it is not much lower than current prices. The potential upside of this trade outweighs the downside risks. A 50% move higher by oil seems substantially more likely than another 50% move lower.  

iPath DJ-UBS Copper TR Sub-Index ETN (JJC) was stopped out of the portfolio on January 13 for a 6.5% loss. Typical seasonal strength for copper was trumped by a surging U.S. dollar and global growth concerns this year.

Aside from today’s new trade ideas and energy-related ETFs, this balance of the portfolio is on Hold. February’s historical track record is rather tepid and following a down January, even weaker.