ETF Trades: Utility Selloff Creates Opportunity By: Christopher Mistal | March 01, 2018 | Email | Print

From Stock Trader’s Almanac 2018, page 92, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. Adequate tech exposure exists in the Almanac Investor ETF Portfolio so we will pass on adding more at this time. However, Utilities appear to be setting up for a new trade.

 

Last year Utilities had a great year, right up until early December. After reaching a peak in early December, Utilities quickly slide lower as interest rates began to move higher. From their peak in late November to the low in February, the sector shed 16.6%. The sector is generally defensive in nature and does offer a relatively hefty dividend (3.55% as of February 27). This year could prove to be an interesting year for Utilities. If the 10-year Treasury yield does breakout above 3.04% and continue to climb, higher rates could pressure Utility shares. However, if interest rates are rising because economic growth is accelerating, then the sector could benefit from the increased demand that could come from higher growth.

 

As can be seen in the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early March bottom and usually lasts through early October although the bulk of the move is typically done sometime in May or early June (blue arrow).

 

 

With nearly $7 billion in assets and ample average daily trading volume, SPDR Utilities (XLU) is a top choice to consider holding during Utilities seasonally favorable period. It has a gross expense ratio of just 0.13%. Top five holdings include: NextEra Energy, Duke Energy, Dominion Resources, Southern Co and Exelon Corp.

 

XLU could be bought on dips below $49.20. This is just above its projected monthly support (green-dashed line in daily bar chart below). Based upon its 15-year average return of 6.4% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, an auto-sell price of $57.58 is set. If purchased an initial stop loss of $47.00 is suggested.

 

 

 

February came to a close yesterday just as it began, poorly. DJIA finished down 4.3%, S&P 500 was off 3.9% and NASDAQ was down 1.9%. Although the worst February decline since 2009, the major indexes did recover a sizable portion of early-month losses. At their respective lows on February 8, DJIA, S&P 500 and NASDAQ were all down nearly 9%. Technology shares experienced the strongest rebound which helped lift the overall average return of the ETF Portfolio to 4.7% from 3.9% at last update.

 

As of yesterday’s close, iShares NASDAQ Biotech (IBB) and iShares Russell 2000 (IWM) were the only two positions in the red. After SPDR Healthcare (XLV), the consumer sector was second best with SPDR Consumer Discretionary (XLY) up 8.4%. Technology and financial related ETFs were in a race for third best. PowerShares QQQ (QQQ) was up 7.8% and SPDR Financial (XLF) had a 6% gain.

 

ProShares UltraShort Silver (ZSL) never traded below its buy limit. Due to the brief duration of the seasonality underlying this trade idea, ZSL trade idea is cancelled.

 

Other than today’s new trade idea in Utilities, all other positions in the ETF Portfolio are currently on Hold. The sudden and dramatic return of volatility can be emotionally challenging. It is during these times it is best to stick with time-tested and proven strategies that have a demonstrated record of performing over the long-term.