The utilities sector has attracted strong capital inflows in recent months, lifting the Dow Jones Utility Average (DJUA) into resistance at the 2017 bull market high. This bullish price action matches large-scale rotations into other safe havens, signaling investor distrust in 2019 economic strength as a result of protectionist trade policies. This defensive behavior is likely to continue next year, even if the Trump administration finally cuts a deal with China.
The average might be sitting at an all-time high right now if PG&E Corporation (PCG) weren't one of its 15 components. The stock has been pummeled in recent months, dropping to a 15-year low in reaction to destructive California wildfires that will generate years of litigation. In fact, 13 DJUA components have lifted into or above the 90th percentile in relative strength, highlighting broad-based buying pressure not affected by local jurisdictions.
This group could now head into a golden period, marked by the most constructive price action since the 2002 to 2007 bull market. Whether you like these stocks for the price action or the hefty dividends, they're certainly worth consideration for long-term investment accounts, just in case we're headed into a darker period for the U.S. economy. That's certainly possible, with populism and protectionism shifting the focus back to domestic equities.
The AES Corporation (AES) plunged from the mid-$20s to single digits during last decade's economic collapse and bounced back above $15 in 2009. That level has marked resistance for the past nine years, with four rally waves failing to penetrate overhead supply. The stock turned higher once again in February 2018 and is now testing resistance for the fifth time, with strong tailwinds raising the odds for a multi-year breakout. The subsequent uptrend could reach the mid-$20s, marking decent upside compounded by a 3.42% forward dividend yield.
Duke Energy Corporation (DUK) sold off between the mid-$80s and low-$20s at the start of the century and entered a slow-motion recovery wave that completed a round trip into the prior high in 2015. It failed to break out during 2016 and 2017 rally impulses, generating a broad triangular pattern that may now complete the final stage of a cup and handle breakout. A rally into the $90s should set off a wave of buying signals, with a first target at $100. The stock currently pays a 4.09% forward dividend yield.
Exelon Corporation (EXC) got pummeled after rallying into the low $90s in 2008, dropping into the upper $30s in 2009. It continued to post lower lows into 2016, finally bottoming out in the mid-$20s. Price action since that time has mounted 2011 resistance in the mid-$40s, raising the odds for a rally into stronger resistance in the upper $50s. That's probably a good spot to take profits, with 2007's vertical decline between the $70s and $50s likely to generate selling pressure. The stock currently pays a relatively meager 2.93% forward dividend yield.
Dominion Energy, Inc. (D) held up relatively well between 2007 and 2009, dropping to a five-year low in the upper teens. It broke out to a new high in 2011, entering an uptrend that posted an all-time high at $85.30 in December 2017. The subsequent downturn failed a three-month breakout through $81, triggering a decline to a four-year low, followed by a recovery wave that has now reached within five points of the failure level.
This price structure may require a different approach than chasing the upside, with the failed breakout likely to slow or stall progress in the coming weeks. As a result, a more defensive strategy is recommended, waiting for a downturn to reach the 50-month exponential moving average (EMA) near $72. Dip buying at that favorable reward:risk level could pay off for multi-year positions willing to wait patiently for new highs. The stock currently pays a hefty 4.34% forward dividend yield.
The Bottom Line
Utility stocks may be at the cusp of multi-year uptrends that book solid returns in long-term investment portfolios.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.