I continue to believe the trend in stocks is to the upside, but I am not blind to some of the less savory developments in the market. Even bulls should consider spreading some of the risk—and that means looking at sectors that do not always move with the big momentum leaders.
Utilities now seem to fit that bill. If the market tumbles, they should be more resistant to declines—and if Treasuries rally, they could even gain a bit.
Adding interest-rate sensitive stocks to a portfolio seems counterintuitive at a time when the Federal Reserve is widely expected to raise short-term interest rates. Long-term rates are also expected to increase as the economy improves, though that hasn’t happened yet: After a brief June gain, the 30-year Treasury rate remains in a low range between 2.77% and 2.95%—and the trend since March is still to the downside.
Such performance tells us that Treasuries are not so convinced the economy is on the upswing, and that’s a good reason to think about a different approach to stocks. Utility companies may have evolved over the years to be more diverse as businesses, but their stocks still provide a safe haven in times of stock market uncertainty.
The Dow Jones Utility Average quietly set an all-time high in June, and after a 5% pullback, it is close to reaching that high-water mark again. It is currently in both short- and long-term rising trends with strong inflows of cash, according to the on-balance volume technical indicator.
What may be surprising is that the utilities average has slightly outperformed the Standard & Poor’s 500 index this year. If the economy is supposedly gearing up for launch, leadership by traditionally defensive utilities seems a bit odd.
One of the better-looking charts is PPL PPL 0.10311936065996391% PPL Corp. U.S.: NYSE USD38.83 0.04 0.10311936065996391% /Date(1502139728971-0500)/ Volume (Delayed 15m) : 1575735 AFTER HOURS USD38.83 % Volume (Delayed 15m) : 5388 P/E Ratio 16.246861924686193 Market Cap 26500348931.7396 Dividend Yield 4.069018799896987% Rev. per Employee 582946 More quote details and news » (ticker: PPL). The former Pennsylvania Power and Light recently broke out from a corrective decline and has already set a new high in its on-balance volume indicator (see Chart 1). That tells us bulls are more aggressive and there is good demand for shares.
The caveat is that the stock is now battling its 50-day average, which acts as a headwind. However, its 4% dividend yield is quite enticing.
Exelon EXC 0.13099292638197538% Exelon Corp. U.S.: NYSE USD38.22 0.05 0.13099292638197538% /Date(1502139772071-0500)/ Volume (Delayed 15m) : 2548269 AFTER HOURS USD38.22 % Volume (Delayed 15m) : 10292 P/E Ratio 20.01047120418848 Market Cap 36646557686.6064 Dividend Yield 3.4275248560962845% Rev. per Employee 960170 More quote details and news » (EXC) also broke out to the upside recently, but from a one-year trading range (see Chart 2). This multi-utility holding company moved through the top of the pattern late last month with good volume support. It trades above its short- and long-term moving averages, so it is officially in a bullish trend as well.
What may be its best feature is only visible on multiyear charts. It is now less than a point away from breaking out from a six-year basing pattern, following a disastrous decline from its 2008 peak. At that time, it traded at roughly $92 before heading to a low in 2015 near $26. (The stock was trading at $38.17 Monday afternoon.)
The long period of flat trading gave the stock time to heal and prepare it for its next attempt to rally.
Not all utilities are qualified to serve as hedges in a portfolio. What primarily makes the above two good candidates are their rising trends. Technical indicators support those trends, while their dividends are nice extras.
Again, the broad market still offers more reasons to expect higher prices, but at some point it will serve up a correction. Utilities can mitigate some of that risk—and you won’t have to hide money at near-zero money-market rates.
Getting Technical Mailbag: Send your questions on technical analysis to us at email@example.com. We’ll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
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