Buy the Utility Sector Fund, Not Stocks, for Safety and Dividends

NEW YORK (TheStreet) -- When the stock market becomes vulnerable, as it was earlier this week, investors should consider buying the Utilities Select Sector SPDR Fund  (XLU) . 

This exchange-traded fund matches the performance of the Dow Jones Utility Average, or DJU, and has a dividend yield of 3.5%. Because the ETF includes a basket of utility companies, it eliminates the risk of picking the wrong stock. At close to $42 the ETF is up close to 10% for the year to date and 11% for the past 52 weeks.

Must Read: 7 Stocks Warren Buffett Is Selling in 2014

When the stock market is volatile and at risk of a correction, investors need to shift their strategy from wealth creation to wealth protection. During the crash of 2008 the utility average dropped 48% to its March 2009 low, compared with 58% for the S&P 500. Investors who bought the utility ETF lost less money and earned the 3.5% dividend.

While many analysts say the current bull market for stocks will continue, there are clues they may be wrong.

For instance, when the stock market is in the process of topping out, the Russell 2000 tends to peak first.

A week ago, the Russell 2000 ended the week in what technicians call a "death cross." A death cross occurs when an index or stock has its 50-day simple moving average decline below its 200-day SMA. When stocks peaked before the crash of 2008 the Russell 2000 peaked first in July 2007 while the S&P 500 didn't peak until October 2007.

A weak euro vs. the U.S. dollar is another warning for stocks as revenue from foreign sales in local currencies are converted to fewer dollars. The euro had a "death cross" on July 7.

As an early warning of slow economic growth, Nymex crude oil began this month with a "death cross." Despite turmoil in the Middle East, the supplies of crude oil are up and demand is down.

This year, the Dow Utility Average set an all-time intraday high on June 30, a day before the Russell 2000. The small-cap index is down 4.6% for the year to date, and utilities are up 11%.

Must Read: 3 Utilities Stocks on the Rise

Investors need to learn that monitoring the technical landscape of the stock market helps maximize gains and minimize losses. Charts map where a market has been so the future path can be projected.

Let's look at the daily chart for the utilities ETF:

Courtesy of MetaStock Xenith

The daily chart for the Utilities Select Sector SPDR Fund shows the index below its 50-day SMA (blue line) at $42.28, which indicates risk to the 200-day SMA (green line) at $41.18. Investors should buy on weakness to the 200-day SMA.

Let's look at the weekly chart for the utility ETF:

Courtesy of MetaStock Xenith

The weekly chart for the Utilities Select Sector SPDR Fund shows longer-term risk to the 200-week SMA (green line) at $36.72. This is another level at which to buy this ETF.

Must Read: Changing Dynamics in the Utilities Sector

The Dow Utility Average is currently below its January 2006 high at 555.71, while the S&P 500 is well above its October 2007 high at 1576.0. This dynamic indicates the S&P 500 will continue to underperform utilities as it has for the year to date.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @Suttmeier

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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