Where To Hide In This Uncertain Market

| June 5, 2012 | 0 Comments

Utility StocksWhat is an investor to do in this wild market?

Should you liquidate your portfolio and run the risk of missing an uptrend like last year?  Or do you stay in?

These are questions that have plagued investors for decades.

Last week, I suggested that we needed to buy and stay in defensive stocks.  These were the only positions that were showing any signs of strength or resilience.

Considering the recent weakness and breach of the low of 1,292 in the S&P 500, this list has narrowed further and is made up predominately of the truly defensive stocks such as utilities.

I know what you’re thinking, this isn’t exactly the most exciting sector, but it’s done well for most of the year.

It’s tough to overcome the fact that while the market rallied in the first quarter, the utility sector traded sideways.  Not that exciting!

Specifically, this was reflected in the price action of the SPDR Select Sector Utilities ETF (XLU).

This sector offers the security of being defensive against the economic slowdown, and it has a very attractive yield.

For example…

We can’t underscore enough this idea of a high yield.

The ETF has a dividend yield of about 4%.

As interest rates continue to drop, this will continue to be an issue for investors who seek income.  Lower rates have been a problem for income seekers for the past few years.  It doesn’t appear that this issue is going away any time soon.

So, utility stocks have become an absolute necessity for investor portfolios.

Even though XLU is a great way to get exposure to a majority of the utility sector, it’s not the only way.

We can find individual utility stocks with good price yields.   But the fact is, the best way to gain exposure to this sector is still the XLU.

The XLU has a price configuration and is positioned for further upside.

Over the past month, the XLU has moved up toward the previous high in the $36 area. This level has contained upside progress and marked the high in December 2011, just before the first-quarter rally got under way.

And it was the overall rally that pulled funds away from utilities as riskier assets were sought.

In addition, long-term support for XLU is at the $34.00-$34.50 level.  Even at this level, the XLU is showing some weakness.  However, the yield component of the XLU has been helpful in preventing any significant weakness.

Here’s the way to think about it…

I would be a buyer of XLU at its current levels, looking for further strength to the $37-$38 level.

Remember, these are utility stocks.  Therefore, we shouldn’t be expecting much in the way of upside progress. Still, a move to the more conservative level of $37 would still be about a 3.5% gain.

And the dividend is a respectable offset to any potential downside move and would obviously add to any gains garnered from price appreciation.

Remember that you can always write some upside call options against this ETF as well, enhancing yield even more.

If nothing else, the utility sector is a place to hide for a while until the negative issues affecting the market get resolved.

Safe Trading,

Marcus Haber

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Category: Options Trading Basics

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.