Tickers in this Article: SPY, XLU, CPL, BIP, EIX
Markets have been strong so far in 2012, with the S&P 500 SPDRS (NYSE:SPY) up 5.69% year to date, and that is after Tuesday's 1.46% slide. While the trend does still remain higher in the S&P 500, a pullback will eventually come, and may be underway now. The utilities sector often provides some safety during market declines. It doesn't mean utility stocks don't decline (they do) but when the broader market is in sell mode, some of that money often flows into the utility sector. This means utility stocks often decline less, or may even appreciate as other stocks fall. Below we look at ETFs and stocks that held up during Tuesday's sell-off and may provide safety going forward if the decline continues.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Utilities Select Sector SPDR (NYSE:XLU) ETF has been flat almost the entire year. As the broader market appreciated, it has stayed right around the $35 level. When SPY sold off 1.46% on Tuesday, XLU stayed within its trading band, and only fell 0.4%. XLU provides a cushion during overall market declines, often declining less and bottoming earlier. For most of the year, XLU has been trading within a relatively tight band, with primary support just above $34 and resistance at $35.45. More recently, the band has narrowed and provides an opportunity to pick up shares if the market continues to decline. A break above $35.45 signals an advance to test the recent high at $36.27. On the other hand, a drop below $34 is bearish, with a target of $32.75, but would likely be the result of an aggressive overall market decline. While the ETF is unlikely to explode higher, it potentially provides safety if the broader market continues Tuesday's sell-off. (For related reading, see An Inside Look At ETF Construction.)

CPFL Energia SA (NYSE:CPL) is a utility stock that has been climbing with the market, and was resilient in the face of recent broad market selling. CPL is a large Brazilian utilities company that is up 16.82% so far this year and held up very well on Tuesday, as large volume came in supporting the stock. Since October of last year, the stock has been moving steadily higher, with recent support at $32. A drop below $32 could result in a test of the longer-term trendline. Trendline support is at $30, along with the 50-day moving average. The next upside target is $34. (For related reading, see Introduction To Technical Analysis Price Patterns.)

Brookfield Infrastructure Partners (NYSE:BIP) manged to pull out a gain on Tuesday as most other stocks slid lower. Up 7.26% YTD, the stock has been in an uptrend since early 2009. The stock has multiple strong support levels at $29.40 (most recent), $29 and $28. The gradual rise of the stock puts the next target at $31.20 and may provide some safety in a broader market decline.

Edison International (NYSE:EIX), which is up 4.01% YTD, has been in a steady trend higher since August, 2011 and manged to hold its ground on Tuesday in spite of the broader market decline. The stock has been stepping higher, leaving strong support in its wake. The stock recently hit $44.50 intra-day when the company released earnings, and having closed at $43.02 on Tuesday, that intra-day is the next target. Support is between $42 and $41.30 with significant support just below $40. (For related reading, see The Psychology Of Support And Resistance Zones.)

The Bottom Line
Whether the broader market, reflected by an ETF such as SPY, continues to decline is unknown. The trend is still higher for most of the major indexes but the largest decline of the year on Tuesday may have some investors looking to move to a potentially safer sector. While these utility stocks are unlikely to explode higher, they do offer some upside potential and can likely provide some shelter if the markets continue to sell. Support levels and risk should still be managed though, as a break below support levels indicates further declines could be forthcoming. (For related reading, see 5 ETFs Flaws You Shouldn't Overlook.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.

Charts courtesy of stockcharts.com

comments powered by Disqus
Trading Center