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We have been managing a position in Duke Energy Corporation (NYSE:DUK) since mid-October. This company operates gas and electric utilities, and it is considered a defensive stock.
We opened this position because, while no stock is safe from the kind of aggressive selling we saw in October, defensive stocks like DUK typically outperform more aggressive growth stocks.
There is a lot of evidence that the major indexes are at support this week, but there still aren’t very strong signs of rising momentum. Because we aren’t in a bear market, investors are likely to prioritize defensive sectors like utilities.
We want to open another DUK position following the one we closed successfully in late October to take advantage of the current market environment and give us a little more diversification in our portfolio.
DUK had a much smaller pull back during the October selloff. Utility stocks tend to be less volatile because they offer strong, consistent dividends. They also have a stable business model because consumers tend to pay their utility bills during both economic upswings and downswings. This defensive characteristic should help DUK continue to outperform in the short term.
Daily Chart of Duke Energy Corporation (DUK) — Chart Source: TradingView
As we pointed out the last time we adjusted our position in DUK, the technicals and fundamentals have been trending in a bullish direction. Looking at DUK’s chart, we see a strong support level at $78 that should serve as a longer-term floor for the stock.
The interest rate environment should add to that bullish pressure. Although low long-term yields (and a flat yield curve) are troubling for the longer-term outlook for the market, it is a bonus for dividend-payers like DUK.
Lower interest rates mean that the discounted value of future dividend payments are higher in present terms. In addition, defensive sectors tend to perform best when the underlying fundamentals (earnings, consumer confidence, etc.) are strong but there is uncertainty hanging over the market, which is the case right now.
Because market conditions favor this stock, we recommend selling puts against the stock.
To find out which puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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