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Buy the Bounce in Utilities

The power sector is set to surge, and an ETF is a great way to get exposure to several strong names in the space at once


The fiscal cliff selling maelstrom that took place immediately following the presidential election has quickly morphed into a very nice bounce for many sectors, not the least of which has been utilities.

Case in point are the bellwether utilities that comprise the Utilities Select Sector SPDR (NYSE: XLU), an exchange-traded fund that’s pegged to a basket of the biggest and best utility stocks including holdings like Duke Energy (NYSE:DUK), Exelon (NYSE:EXC), Dominion Resources (NYSE:D), American Electric Power (NYSE:AEP), Pacific Gas & Electric (NYSE:PCG) and Con Ed (NYSE:ED).

The chart here of XLU shows just how far the fund sank at the beginning of November. From Oct. 31 to Nov. 15, XLU shares dropped nearly 8%. More importantly, the measure of the normally steady dividend-paying segment plunged below both the short-term, 50-day moving average as well as the long-term, 200-day moving average.

Chart courtesy of

Then almost as quickly as it fell, XLU began to jump back up, and since reaching its November low the fund is back up nearly 3%. As of Dec. 5, the fund was on the cusp of breaking back above its 200-day average, a technical trigger that will likely bring many more buyers back into the sector. That buying should also bring the fund above the 50-day average, and that would bring more technical traders to the XLU party.

The one factor that has created so much volatility in the space is the fear that dividend taxes will go up if there is no resolution on the fiscal cliff. That fear has been supported by the record number of companies that have declared special dividends this year rather than chance the higher tax rate next year. However, what we’ve seen of late is a move back into dividend stocks like utilities, and a diminishing of the fear that a bigger tax bite on dividends will keep investors from the sector.

For traders, the latest bounce is, indeed, an opportunity to ride the utility buying wave. I think a surge back above $39 is quite achievable by mid-January, and that would represent a gain of more than 10% in just the next four weeks

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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