Utilities have emerged from their long slumber and are challenging bull market highs, despite Wall Street’s unrelenting focus on growth and risk-taking. The sector’s quiet strength highlights similarly constructive action in other traditionally defensive market groups, including bonds and precious metals. Taken together, investors may love big tech but are hedging their bets with safe havens that should outperform if the broad averages turn lower in coming months.
Even so, choose exposure wisely due to broad regulatory, corporate and resource variations, with self-regulated companies performing better than those forced through legislative channels to increase rates. Utilities more tightly levered to commodities are lagging as well, with lower natural gas and crude oil prices undermining profits. As a result, it makes sense to stick with industry leaders while limiting exposure to broad-based sector funds.
NextEra Energy, Inc. (NEE) topped out at $73.75 in 2007 and sold off to $33.81 in 2008. It completed a round trip into the prior high in 2012 and broke out one year later, entering a strong uptrend that’s continued into 2017. However, volatility has risen sharply since 2014, with deep corrections and vigorous bounces defining two-sided action, in which bulls have withstood mounting selling pressure.
The stock topped out at $132 in July 2016 and sold off in multiple waves that reached a seven-month low at $110 after the November election. It turned higher into January, reaching the prior high in March and pulled a back in the last phase of a cup and handle pattern, ahead of a May breakout that continues to add points at a rapid pace. Given technically overbought readings, market players should wait for a pullback to new support at $134 before getting on board. The company pays a 2.62% dividend.
American Electric Power, Inc. (AEP) stalled in the low-50s in 1998 following a long uptrend and reversed at that resistance level in 2001 and 2007. A 2013 test yielded a multi-decade breakout, followed by a strong uptrend that’s eased into a rising channel with support in the upper-50s and resistance in the mid-70s. A bounce that started at channel support in December 2016 has now reached within 4-points of channel resistance.
Also, the stock has just completed a 100% retracement into resistance at the July 2016 high at $71.32, raising odds for a multi week reversal and pullback that could offer a lower-risk entry price. The 200-day EMA rising through the mid-60s looks like a natural downside target, with that level offering more favorable reward: risk than buying a breakout. The company pays a 3.20% dividend.
Nisource, Inc. (NI) topped out in the lower teens in 1998 and reversed at that level in 2001. It took more than a decade for the next return trip, with price reaching resistance in 2013 following a 10-point rally off the 2009 bear market low. It broke out into 2014, grinding higher in a narrow rising channel that paused in the second half of 2015. It reentered the pattern at year’s end and continued to gain ground into the July 2016 high at $26.94.
A decline into December dropped the stock to an 8-month low at $21.17 ahead of a recovery wave that stalled above $24 in March 2017. It broke out above that resistance level about two weeks ago and charged higher, lifting within a point of resistance this week. On Balance Volume (OBV) has matched bullish price action, setting the stage for a breakout, perhaps after a final reversal yields a test at new support (blue line). The company pays a 2.61% dividend.
The Bottom Line
Utilities have attracted steady buying pressure in recent months, despite the media’s narrow focus on growth stocks, and could post new highs in coming months.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication. >