When broad market volatility picks up, it is not uncommon to see investors allocate capital to relatively stable segments such as reserve currencies, fixed income, precious metals, utilities and financials. In the paragraphs below, we'll take a look at several charts from within the utilities sector. The extremely high barriers to entry, recurring revenue streams and commodity-like nature of the underlying businesses make this an ideal sector for investors seeking stability, income and long-term growth.
As mentioned above, active traders generally turn to relatively stable sectors such as utilities during times of heightened volatility. The increased buying pressure is evident on the chart of the Utilities Select Sector SPDR Fund. Followers of technical analysis will likely want to note that the 50-day moving average has recently crossed above the 200-day moving average. This bullish crossover is referred to as the golden cross and is commonly used to mark the beginning of a long-term uptrend. From a risk management perspective, traders will likely look to protect their long positions by placing stop-loss orders below $50.80 in case of a sudden shift in the fundamentals.
With a market capitalization of nearly $60 billion, there are few companies with the breadth of operations of Duke Energy. As you can see from the chart below, the recent surge in buying pressure has sent the price higher over the past several months, which has also triggered a bullish crossover between the long-term moving averages (shown by the blue circle). Active traders will likely maintain a bullish outlook on Duke Energy shares until major indicators show signs of reversing or stops are triggered below the September swing low near $78.
The long-term uptrend shown on the chart of NextEra Energy is a clear example of why active traders turn to utilities for stable growth. Notice how each pullback toward the long-term support levels since early 2016 has presented traders with lucrative entry points from the perspective of risk-to-reward. Buy orders will be placed as close to the long-term support as possible, and then stop-loss orders will be placed below either the dotted trendline or the 200-day moving average, depending on risk tolerance.
The Bottom Line
The utilities sector offers active traders an interesting mix of stability, growth and income. Defined uptrends and long-term buy signals make this an ideal sector for those looking to take shelter from the volatility that has been so prevalent in the broader markets over the past several weeks.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.