On Tuesday, stocks opened lower due to weakness in Europe. But selling accelerated when Senate Majority Leader Harry Reid said that “little progress” had been made in the fiscal cliff negotiations. Despite some positive economic reports, the comments by Reid created an immediate reaction from sellers as the Dow fell 75 points within minutes of his announcement.
At Tuesday’s close, the Dow Jones Industrial Average was off 89 points at 12,878, the S&P 500 fell 7 points at 1,399, and the Nasdaq lost 9 points at 2,968. The NYSE traded 688 million shares and the Nasdaq crossed 406 million. On both exchanges, decliners were ahead of advancers by 1.3-to-1.
Despite the emotional reaction of the markets to the back-and-forth comments from politicians, the CBOE Volatility Index (VIX) is still surprisingly apathetic. At a critical time when the major indices are backing away from their 200-day moving averages, the VIX should be in the mid-20s, while it sits near 16. Perhaps it is telling us that the politicians will get their act together before we all fall off the fiscal cliff.
The recent tumble by the normally stable utility sector is beginning to attract buyers. Note Tuesday’s strong buy signal on the Dow Jones Utility Average from the MACD.
The utility group is composed of many low-risk companies with solid long-term returns from solid revenue bases. They offer decent returns even after applying proposed changes in the taxation of dividends, and are especially attractive when compared to the ultra-low return of Treasury bonds.
This long-term chart of the Dow Jones Utility Average shows that its bull market is intact. It also illustrates that in a major bull trend even the most stable industries occasionally provide an unusual buying opportunity. In fact, each year this group has had a major correction that offered long-term investors excellent entry points.
Conclusion: The major indices backed down from their 200-day moving averages Tuesday, thus confirming that the recent rally is on a near-term slippery slope. But these headline-based corrections offer trading opportunities, and my recent charts offer guidance to our regular readers who are in-and-out speculators. Please refer to them for timing.
Today, I want to emphasize what I consider to be the best buying opportunity for long-term investors whose goal is high annual total return with protection of capital. With dividend yields for my three favorite utilities — Duke Energy (NYSE:DUK), Southern Company (NYSE:SO) and Exelon (NYSE:EXC) — all above 4% and potential annual growth at 8%-plus, these stocks should not be ignored. Buy utilities now for a consistent total annual expected return of over 12%.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.