ETF Trades: Utilities Could Win Either Way
By: Christopher Mistal
February 02, 2017
Tomorrow morning the first jobs report of 2017 will be released. Earlier this week, ADP’s National Employment Report showed private sector employment increased 246,000 (seasonally adjusted) while the median forecast for tomorrow’s report is slightly below 200,000. This would be an improvement over last month and would confirm the U.S. labor market remains on firm ground.
The market has generally responded favorably to January’s jobs report. Over the last 16 years DJIA has advanced 9 times while S&P 500, NASDAQ, Russell 1000 & 2000 have all advanced 10 times on the day the January jobs report was released. Average gains range from 0.13% for NASDAQ to 0.49% for Russell 2000. After being up for seven years straight from 2008 to 2014, the market has fallen in each of the last two years.
[February’s Jobs Report Day Performance table]
New Sector Trade Idea
From the Stock Trader’s Almanac 2017, page 94, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. Adequate tech exposure remains in the Almanac Investor ETF Portfolio so we will pass on adding more. Last year, the Utilities sector started off the year on a near chart-perfect bullish climb from the bottom left to the top right that lasted until an early-July high.
So far this year Utilities have been somewhat dull, moving mostly sideways. The sector is not at all-time highs, but it is not too far away either. The sector is generally defensive in nature and does offer a relatively hefty dividend. This year could prove to be an interesting year for Utilities. If the Trump administration stumbles and disappoints the market, the defensive nature of the sector could attract traders and investors. However, if the new administration is successful and economic growth does begin to accelerate, then the sector could benefit from the increased demand that is likely to come from higher growth.
As can be seen in the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early March bottom and usually lasts through early October although the bulk of the move is typically done sometime in May.
[Utility Sector Index (UTY) Weekly Bars and Seasonal Trend Chart]
With a little more than $6 billion in assets and average daily trading volumes in excess of 12 million shares per day, SPDR Utilities (XLU) is the top choice to hold during Utilities seasonally favorable period. It has a gross expense ratio of just 0.14% and comes with the added kicker of a 3.37% dividend yield. Top five holdings include: NextEra Energy, Duke Energy, Southern Co, Dominion Resources and Exelon Corp.
XLU could be bought on dips below $48.20. This is just above its projected monthly support (green-dashed line in daily bar chart below). Based upon its 15-year average return of 6.1% during its favorable period mid-March to the beginning of October, an auto-sell price of $56.25 is set. If purchased an initial stop loss of $44.00 is suggested.
[SPDR Utilities (XLU) Daily Bar Chart]
Portfolio Updates
Even though this January was the first up January since 2013, gains were modest and thus gains in the ETF Portfolio were also modest. Tech performed well in January which helped lift our holdings in IYW, XLK and QQQ. The best performing holding in the portfolio overall, and in January, is Global X Copper Miners (COPX), up 16.9% since mid-December.
Some tepid earnings from the energy sector afforded the opportunity to add SPDR Energy (XLE) on the penultimate trading day of January. Energy prices have firmed and the market appears to have stabilized, but expectations may have been prematurely high given the relatively brief period of time since finding stability. This recent addition could prove timely as the summer driving season nears.
The anticipated mid-January break did materialize, however it was brief and mild. Neither ProShares UltraPro Short S&P 500 (SPXU) nor ProShares UltraShort S&P 500 (SDS) traded high enough to trigger an automatic sale during the weakness. Both were stopped out on January 25 when DJIA closed above 20,000 for the first time. Minor losses were recorded on both positions.
Positions in First Trust Natural Gas (FCG) and United States Natural Gas (UNG) targeting seasonal strength in natural gas have been added to the portfolio. A mild January has dampened demand for heating and inventories are still in the average range for this time of the year. Spring does not officially arrive for another six-plus weeks. Time remains for colder weather and higher natural gas prices.
[Almanac Investor ETF Portfolio – February 1, 2017 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in FCG, IWM, IYT, QQQ, SPY, VNQ, XLB, XLP, XLV and XLY.