This column was originally published on RealMoney on Nov. 27 at 1:13 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
Utility stocks haven't gotten much attention lately, but it looks like that's going to change in a hurry. The sector has finally moved into an excellent position to continue the strong bull run it began in October. So let's identify fresh opportunities in the group and get ready to tap into America's power grid.
Technology and telecommunications are getting all the press these days, while less-exciting sectors, like utilities, have dropped quietly into the shadows. But the utilities' bull setup might indicate that traders and investors are ready to take profits in the most popular market groups and look elsewhere for long-side exposure into year-end.
We saw evidence of this possible rotation during last week's rally in the real estate investment trusts, or REITs. This relatively calm group went vertical after
Equity Office Properties
agreed to be acquired by Blackstone Real Estate Partners, an affiliate of The Blackstone Group. Look for more of these sudden awakenings into year-end, as blue-chip, technology and small-cap stocks become more vulnerable to profit-taking.
Which other underloved sectors might benefit from rotational inflows in the weeks ahead? I'd keep a close eye on steel, financial services and chemicals. Even drug stocks are looking better these days, despite post-election paranoia.
Consider the positive influence of natural gas prices on the utility sector right now. The commodity is having a solid third quarter, outperforming crude and heating oil by a wide margin. The bullish basing pattern above $5 on the weekly chart suggests this positive trend will continue through the key winter months.
I especially like the price action in the past five weeks. Natural gas has congested into a tight range at eight-month resistance. This relatively quiet period may yield a strong breakout that spikes through the "round number" 10 very quickly. Of course, this commodity's fate will be tied closely to the winter weather.
Accuweather senior meteorologist Joe Bastardi currently forecasts lower-than-normal winter temperatures on the central and southern Atlantic coast, and higher-than-normal temps in the upper Midwestern states. This is a mixed outlook because both of these regions are major natural-gas users, so the conflicting forecasts cancel each other out.
The tightly bound congestion on the weekly chart likely represents a forecast-dependent holding pattern. With an El Nino oscillation setting up over the Northern Hemisphere, we could see dramatic movement in the commodity as weather headlines take center stage. With the bullish natural-gas setup, I'm betting on a colder-than-expected winter.
offers a narrow subset of the highest-capitalized sector stocks. Volume has slacked off tremendously in the exchange-traded fund this year, even though it's trading near multiyear highs. Declining interest has coincided with the rebirth of broad speculation and the introduction of competing instruments targeting the sector.
The UTH broke above six-year resistance in October, jumped up to $128 and dropped into a tight consolidation pattern. It's been moving sideways for the past two weeks, but that should change soon. A price expansion from this level should be sustained, allowing for a tight stop-loss on the other side of the congestion after bull positions are taken.
Conversely, don't try to catch any falling knives here. If the stock sells off from this two-week pattern, it will likely continue lower and test the October breakout between $123 and $125. But I favor the bull outcome in the next week or two and will be watching for confirmation through a rally up and over $131.
Utilities Select Sector SPDR
Utilities Select Sector SPDR
offers another take for
readers seeking exposure to the utility sector. This instrument is more liquid than the HOLDRs, so it's easier to get in and get out. It also shows a slightly more bullish chart, with fewer layers of resistance.
The XLU also broke out in October, rallying to an all-time high at $36.16. It returned to this level last week and now shows a short-term breakout pattern. A thrust over four-week resistance will confirm last month's breakout and set the stage for a persistent uptrend that could gain several points by year-end.
This is a less volatile instrument than the HOLDRs, but it also pays a higher dividend. These characteristics should allow for larger-sized positions held for longer time periods. So the XLU might be a better bet for investors, while traders can focus their firepower on the far jumpier UTH.
Which utility stocks will offer the best plays as we move into year-end and the start of 2007? I'll be back Tuesday with my watch list of sector favorites.
At the time of publication, Farley had no positions in any of the securities mentioned in this column, although holdings can change at any time.
Alan Farley is a professional trader and author of
The Master Swing Trader
. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;
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