In a market buffeted by global cross-currents and worries over the "fiscal cliff," MoneyShow's Tom Aspray suggests that those not invested in stocks should look to one high-yielding sector, as well as two of its key stocks.
Stocks closed mixed on Friday, suggesting a possible loss of short-term momentum, but a correction in stocks is likely to be an opportunity for those who are not already invested to buy.
Despite the impressive 16.4% gain so far this year in the Spyder Trust (SPY), the investing public continues to be skeptical (if not frightened) about entering the stock market. Data from Lipper suggests that $137 billion has been removed from stock mutual funds so far in 2012, with $267 billion moving into bond funds. Some of the money has also gone into ETFs, which had an inflow of $89 billion.
The reinvestment of dividends has also been supportive for the stock market. In August, S&P 500 companies paid out $34 billion in dividends. Many hedge funds apparently missed the start of the rally from the June lows, and individual investors are wondering if it is too late to buy now.
One of the stock market's most defensive sectors typically bottoms in the middle of October. Last week's technical action identified three specific ways to invest in today's market.
Chart Analysis: The Select Sector SPDR Utilities (XLU) has assets over $6 billion, with a yield of 3.94% and an expense ratio of 0.19%. It peaked at $38.54 in July, and is currently trading 4.6% below its highs.
- There is short-term support now at $36.50, and then at $36.20 to $36.30.
- XLU did trade below chart support at $36.10 in the latter part of September.
- The 38.2% Fibonacci retracement support is at $35.05, with the year's low at $34.17.
- The daily relative performance or RS analysis has broken its downtrend (line a) and is back above its WMA.
- The daily on-balance volume (OBV) has moved above its WMA, which is trying to flatten out.
- The weekly and monthly OBV (not shown) did confirm the July highs.
- There is next resistance at $37 to $37.62.
Southern Company (SO) is a $40 billion electric utility that currently yields 4.3%. It is a 8.9% holding in XLU. At the end of July, SO peaked at $48.59.
- The September low of $44.64 was right in the middle of a band of support (line c), representing an 8.1% decline from the highs.
- There is short-term support now at $45 to $45.50
- The relative performance has rallied above its WMA, and a move through resistance (line d) will suggest that SO is ready to outperform the S&P 500.
- The daily OBV has broken its downtrend from the July highs, and is holding above its WMA.
- The monthly OBV (not shown) has continued to make new highs over the past two months.
- There is next resistance at $46.40 to $46.80, then $47.50.
Sempra Energy (SRE) is a $16 billion gas utility that reversed sharply last week after recently testing the major support in the $64 area. SRE currently yields 3.6%
- SRE had a high on August 1 of $72.32, and is now 7.8% below the highs.
- There is initial support now at $66 to $65.50, followed by $64.50, with the long-term uptrend at $63.40.
- The weekly relative performance did confirm the recent high, and has turned up from its long-term support (line c).
- The weekly on-balance volume (OBV) tested multi-year support (line d) and its uptrend (line e) before turning higher last week.
- The daily RS and OBV analysis (not shown) are also now positive.
- There is next major resistance in the $68.50 to $69 area
What it Means: The Select Sector SPDR Utilities (XLU) is a defensive sector that seasonally bottoms in mid-March and also in the middle of October. XLU has typically topped in the latter part of December, which was the case last year. The other key sectors that typically bottom in October were discussed in last week's Trading Lesson.
For those who are not invested in the stock market, I would recommend either buying XLU or a combination of the two stocks. Since Southern Company (SO) is a large holding in XLU, I would not recommend buying it and XLU. A two-stage buying process is recommended.
All three plays could gain 4% to 5% by the end of the year, in addition to the dividend.
How to Profit: For Select Sector SPDR Utilities (XLU), go 50% long at $36.64 and 50% long at $36.12, with a stop at $34.88 (risk of approx 4.4%).
For Southern Company (SO), go 50% long at $45.68 and 50% long at $45.06, with a stop at $43.48 (risk of approx 4.2%).
For Sempra Energy (SRE), go 50% long at $66.05 and 50% long at $65.56, with a stop at $63.22 (risk of approx 3.9%).
Portfolio Update: Investors who followed my earlier recommendation should be 100% long Select Sector SPDR Utilities (XLU) from $34.59. Use a stop at $34.88.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.