Seeking Alpha

Utilities Keep On Giving

Includes: NEE, XLU
by: Michael A. Gayed, CFA

In a time when the general stock market moved sideways in search of direction, some sectors made new highs.

I know a bullish trend when I see one, and utilities respect all the rules: relentless higher highs and higher lows.

Utilities look interesting, especially because the Fed turned around.

Generally, a rising trend in rates is bearish for stocks; a falling trend is bullish. - Martin Zweig

In a time when the general stock market moved sideways in search of direction, some sectors overperformed. Utilities (XLU) had a fantastic run for the last decade. Is it too late to jump in?

Utilities respect all the rules of a bullish trend: relentless higher highs and higher lows, no matter what the monetary policy in the United States was. Did the Fed hike? No problem! QE? Still, no problem! No matter what, utilities made new higher highs.

In fact, a recent Lead-Lag report focuses just on that: the broader long-term trend here is bullish, and all signs point to lower interest rates that should fuel the rally even further. Even more impressive is that the correlation between the real-estate sector is at an all-time high.

Recently, the Fed announced it'll buy T-Bills monthly beginning mid-October and going on until at least April next year. So, for the next six months, the Fed eases the monetary conditions, despite not calling the program QE.

Utilities look interesting, especially because the Fed turned around. The two rate cuts, coupled with the new easing should bode well for a rising, bullish trend - the question is, how to trade it?

One way is to trade the entire sector. XLU provides exposure to electric, multi-line, water, or natural gas utilities. Trading a sector is both a blessing and a curse - XLU dominates its segment, has huge volume, but is more concentrated in a handful of big firms. In any case, a good choice for gaining exposure to the segment.

Another way is to focus on the leader. That is, the dominant firm - NextEra Energy (NYSE:NEE). It makes about 13% of XLU.

For two decades, it advanced like a madman. An almost parabolic advance, difficult to find on many companies. It is a stock present in nearly two-hundred US ETFs, one of the first choices for many managers.

To get in, one needs to go on the lower time frames. If the series of higher highs and higher lows is to survive, that's where a good entry spot lies.

Here's a plan. The monthly time frame reveals a rising channel forcing the upper edge. First, wait for the price to get closer to the lower edge before getting in. The invalidation area below breaks the lower highs series. Second, an entry on a new higher high makes sense too.

After all, this is a bullish trend. Why not ride it?

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Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.