The specter of higher rates continues to take its toll on utility stocks. Look no further than the king of utility funds — the Utility SPDR (ETF) (NYSEARCA:XLU) – which has fallen close to 10% from its early-July peak. Bonds, real estate investment trusts (REITs) and other interest-rate-sensitive securities have fallen in kind.
The question circling the minds of traders is whether this is the beginning of the long-awaited comeuppance for assets (like utility stocks) which have ballooned during the reign of zero interest rates.
Nailing a top in XLU and the like has been tricky, to say the least. Each and every time these beloved income-generating assets have begun to buckle over the past three years, buyers sallied forth, hell-bent on destroying traders silly enough to fade the aging bull in utility stocks.
But with one rate hike behind us and another looming on the horizon, maybe this time is different. Perhaps the nascent downtrend in XLU is destined to succeed where so many others have failed.
It certainly has been sufficient in trashing a number of support levels on the daily chart.
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The spate of down days striking utilities a few weeks back ushered XLU below the 200-day moving average. Consider that a brag-worthy victory for short sellers. Furthermore, the 20-day and 50-day moving averages are descending in weak-sauce fashion. No matter how you slice it, folks, those dastardly bears have wrested control of the daily chart.
But, all hope — at least for XLU longs — is not lost.
For all their fury, sellers have yet to turn the weekly chart of XLU which has been a B-E-A-S-T of an uptrend for years and years. So, while the daily downtrend has all the potential in the world to continue reigning losses on shareholders, weekly support levels need to give way before the fun can really begin.
Ride the Rate Scare with XLU Puts
If you think the path of least resistance remains lower, consider grabbing XLU put options. To provide ample time for bears to do their dirty work, buy the Mar 2017 $50 puts for $3.35. The risk is limited to the initial debit and will be forfeited if the utility stock fund sits above $50 at expiration.
The reward is limited only by the ETF falling to zero so consider your potential gains unfettered should utilities really bite the dust.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
