ETF Trades: Utilities’ Run Could Continue
By: Christopher Mistal
March 07, 2019
Featured in the Stock Trader’s Almanac 2019, on 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 Sector Rotation ETF Portfolio, so we will pass on adding more at this time. However, Utilities are at an interesting level worthy of consideration.
Last year Utilities had a solid year, right up until mid- December. At that point broad market weakness finally dragged the sector lower. However unlike other sectors and indexes that violated key support levels, Utilities did not take out key, long-term support. The sector has since recovered and broken out to new highs. Declining interest rates and slowing growth concerns are likely fueling the strength the sector is currently enjoying. And should growth cool as forecast, the Fed may need to reconsider additional tightening which could be a positive for Utilities and even the rest of the market.
In the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-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).
[Utility Sector Index (UTY) Weekly Bars and Seasonal Trend Chart]
With nearly $9 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% and a relatively attractive yield of 3.08%. Top five holdings include: NextEra Energy, Duke Energy, Dominion Resources, Southern Co and Exelon Corp.
XLU could be bought on dips below $56.50. This is just above its projected monthly pivot (green-dashed line in daily bar chart below). Based upon its 15-year average return of 8.3% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, set an auto-sell price at $67.31. If purchased an initial stop loss of $52.26 is suggested.
[SPDR Utilities (XLU) Daily Bar Chart]
Sector Rotation Update
Market momentum from January did spill into and continue throughout the month of February. The pace of gains did slow, however February was well above historical average performance this year. DJIA gained 3.7% in February. S&P 500 was up 3.0% and NASDAQ advanced 3.4%. This broad strength did translate into gains for the Almanac Investor Sector Rotation and Tactical Seasonal Switching ETF Portfolios. The average open position gain in the Sector Rotation Portfolio is now 7.0% while the Tactical Switching Portfolio is up 4.5% on average.
Due to broad strength open trade ideas presented in early January remain open as XLF, XLP, XLY, XLV and XLI did not trade below their respective buy limit prices in February. Buy limits for these positions have been adjusted for their recent gains as well as the current market environment. XLF, XLP, XLY, XLV and XLI can still be considered on dips below their updated buy limits.
Last month’s trade ideas aimed at taking advantage of seasonal weakness in precious metals, gold and silver, have been partially successful. DB Gold Double Short (DZZ) has been added to the Sector Rotation Portfolio, but ProShares UltraShort Silver (ZSL) has not been added. DZZ was up 8.6% at yesterday’s close and is on Hold. ZSL appears to have run away and the trade is cancelled. A current chart of gold appears to have the best downside potential. Silver is currently closer to its recent lows and appears to have less opportunity.
Other than today’s new trade idea in Utilities, all other positions in the Sector Rotation ETF Portfolio are currently on Hold.
[Almanac Investor Sector Rotation ETF Portfolio – March 6, 2019 Closes]
Tactical Switching Strategy Update
All positions in the Tactical Seasonal Switching Strategy Portfolio are on Hold. Our seasonal MACD Sell signal for DJIA and S&P 500 can come as early as April 1, less than four weeks from now.
[Almanac Investor Tactical Seasonal Switching ETF Portfolio – March 6, 2019 Closes]