This Utilities ETF May Be Your Best Choice For Riding Out A Thinly Traded Market (XLU, SO, D, EXC, DUK, NEE, FE)

David Gillie:  Mr. Market believes all the bad news until Election Day is behind him. His assumption may not be unfounded. After more than a year of anxiety and headlines about the crisis in Greece, their default was a one hour event in the market. High oil prices, which is usually a burden on the market, is being spun as “good” news about the economy. The Labor Department under an incumbent president in an election year will assure the unemployment rate reported to be under 8% for the summer campaign trail. I suspect the end of the Mayan calendar is also “baked in”. 

Whether you believe the euphoria or not, Utilities (NYSEArca:XLU) is a defensive way to enjoy the ride without sitting in the front seat of the roller coaster. The folks in North Dakota aren’t going to turn off their heat if Portugal defaults on their bonds. People in Florida aren’t going to turn off their air conditioning if Israel bombs Iran. And no matter who wins the election, America isn’t going to unplug the refrigerator and turn off the lights.    

We’ve only had one significant down day in four months. Yet, the volume during that time on a daily basis looks like the low levels you see on days before a holiday. Since that one day drop of 200 points last week, volume dropped even from the previous low levels. Traders appear to being eying the market with a jaundiced eye holding out for another load of “free” money by the Fed announcing QE3. The VIX has dropped to comatose levels.  

Utilities Select Sector SPDR (NYSEArca:XLU) is the safest seat on the ride. [The Southern Company (NYSE:SO), Dominion Resources (NYSE:D), Exelon Corporation (NYSE:EXC), Duke Energy Corporation (NYSE:DUK), NextEra Energy (NYSE:NEE), FirstEnergy Corp. (NYSE:FE)]

A smart active trader confided in me not long ago that, with all his brilliance in stock picking and trend following, his wife who had all her money in Southern Company, turned over better gains than him year after year. Almost 4% dependable dividend doesn’t hurt either. Even dismissing the nearly 14% gain this year, the 4% return on your investment is better than you’ll get from Treasuries or CDs. 

Utilities have had a recent advantage of natural gas and coal at ridiculously low prices improving the bottom line. However, a mild winter kept revenues relatively low. But even that wasn’t unusually so as much of the northeast still uses oil for heating. Summer is the season for utility companies as electric power is virtually inescapable for air conditioning. 

Options are available on XLU so the most conservative options strategy of selling covered calls can further increase your yield in this position. 

As the S&P500 has enjoyed a low volume melt up, utilities have been rather uninteresting so far in 2012 remaining virtually flat, until yesterday.

Volume in XLU remains relatively consistent with only one sell spike on January 3rd this year and any other volume spike being on buying. Yesterday’s volume was 17% above average on a buy that significantly moved the price up.

Price on XLU has hugged the 50 day moving average in a consolidation pattern. Although the horizontal price action did not remain within the current channel, the breach didn’t trigger selling. Yesterday’s move was a breakout of this pattern with conviction volume. This isn’t to say that XLU is going to the moon, but it does indicate traders moving defensively into this position. We may see some resistance as price rises to meet the lower channel line, but the breakout volume is likely to overcome that minor resistance. 

The breakout appears to be definitively confirmed by the +/- Directional Indicator at the bottom of the chart.Stochastics and relative strength indicators are just bumping against the overbought level. That may trigger some short term traders to take a profit, but utilities aren’t a sector that is especially prone to short term trading. Additionally, the money flow index and MACD show plenty of room to move to the upside in XLU. 

XLU may be your best choice for riding out a thinly traded market. 

Disclosure: At the time I writing, I have no position in XLU.

Written By David Gillie For The ETF Digest

ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds.  ETF Digest was founded in 2001 and was among the very first to see the  need for a publication that provided individual investors with  information and advice on ETF investing. Even if you’re not a fan of  chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.

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