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Utilities Are In Season

Since 1969 the Dow Jones Utility Average (DJUA) has posted a positive fourth-quarter return 36 times, including 8.3 percent last year.

This year I'm betting on a repeat performance with ProShares Ultra Utilities (NYSE: UPW). The exchange-traded fund (ETF) is set up to rise 2 percentage points for every one-point increase in the DJUA.

My advice is to buy as close to Oct. 1 as possible and sell after Jan. 1. Utilities' fourth-quarter gains are often unwound in the first quarter, as the institutions that dominate trading seek out higher growth investments at the start of a new year.

At that point the better play is ProShares UltraShort Utilities (NYSE: SDP), an ETF that rises 2 percentage points for every point the DJUA falls.

One note of caution on this year's trade: If Washington fails to compromise after the November election to prevent a tumble over the fiscal cliff, late-year market action could come to resemble what we saw in August 2011.

In this case utility stocks won't be immune from selling, particularly with taxes on dividends likely to rise.

So long as you don't use margin on this trade, however, ProShares Ultra Utilities should recover from even a steep near-term loss. In fact, if the economy does slow in the wake of tax increases and government spending cuts, utilities' recession-resistant dividends will be more attractive than ever.

Those interested in protecting a large portfolio of utility stocks from the possibility of a full-scale market sell off this autumn may want to consider buying some ProShares UltraShort Utilities.

The fund's usually a loser in the fourth quarter of the year. But it has been a big winner in those thankfully rare years when Wall Street lays an egg, and its returns will consequently offset any losses utility stocks sustain. See The top 5 Utility Stocks, for more fourth-quarter utility plays.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Stocks: SDP, UPW