Talk of trade war and other geopolitical banter has caused volatility to rise over the past several weeks. This heightened sense of uncertainty has forced many investors and traders to examine their asset allocation and increase exposure to historically reliable and stable sectors such as utilities. In this article, we take a look at several charts of bellwethers from within the utilities sector to determine how traders will look to position themselves over the weeks or months to come. (For a quick refresher, check out: Active Traders Turn Bullish on Utilities.)
One of the most popular exchange-traded products that is used by retail investors for tracking the performance of the utilities sector is the Utilities Select Sector SPDR Fund. Fundamentally, this fund comprises 29 holdings of major companies that produce, generate, transmit or distribute electricity or natural gas. As you can see from the chart below, the price has recently surpassed the combined support of a horizontal trendline and its 200-day moving average. This bullish price action will likely be regarded by active traders as a buy signal and could be the catalyst for a continued move higher. Based on the pattern, traders will likely be looking to set their target prices near the 2017 high of $55.77. (For more, see: The Utility of Trendlines.)
Investors looking for individual names to invest in within a given sector often look to holdings of popular exchange-traded products such as XLU noted above. With a weighting of just over 12%, NextEra Energy is the fund's largest holding, and the strong price action shown on the chart could be one of the main reasons that XLU is starting to show up on the screens of traders. The sideways price action over the past several months is known as a period of consolidation and is commonly found in the middle of a major trend. The series of closes above the resistance level, shown by the blue circle, will likely be used by the bulls as a sign that the upward momentum is about to resume and could be a catalyst of a significant move higher over the coming few weeks. (For more on this topic, see: Hesitant Traders Turn Their Attention to Utilities.)
Another top holding of the XLU ETF is Duke Energy with a weighting of approximately 8.35%. By taking a look at the chart below, you can see that the surge in momentum over the past month has sent the price beyond the major resistance of its 200-day moving average. Technically, this is a major victory for the bulls and could be an early indication of a continued move higher. From a risk-management perspective, traders will likely set their stop-loss orders below $79.26 in case of a sudden shift in the underlying fundamentals. (For further reading, check out: What Technical Tools Can I Use to Measure Momentum?)
The Bottom Line
The utilities sector is often regarded as one of the safe havens of the financial markets because of the consistent cash flows and high barriers to entry. As volatility and uncertainty start to climb around the world, many traders will likely look to increase exposure to utilities, which seems to be a theme that is starting to play out on the charts mentioned in the article above. (For more on this topic, check out: Invest in Utilities With These ETFs.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.