Just a few months ago, it was a no-brainer -- sell the utility sector.
After all, with Janet Yellen and the Fed primed to hike interest rates in 2017, high-yield stocks like utilities were primed for lower ground ahead. Sure enough, the Fed voted to raise its benchmark rate last month, the second such move in three months, and only the third rate hike since the financial crisis of 2008.
Only utilities haven't been in a tailspin. Wall Street got this trade very wrong.
In fact, the utility sector has been one of the hardest-charging corners of the market in 2017, the Utilities Select Sector SPDR ETF (XLU) up almost 8% since the start of the calendar year. There are some good reasons for that. For starters, there's the slow rate at which the Fed is projected to boost rates in 2017. No rate-hike surprises are on the horizon here.
Likewise, as more market participants worry that this rally is getting long in the tooth, the defensive posture of utility stocks plus the high likelihood that Yellen and company would hit the brakes on future 2017 hikes if markets drop hard, makes utilities an attractive place to be right now.
That's not likely to change. As I write, a handful of high-yield, major utility stocks are on the verge of breakout moves this spring. To figure out which ones to buy, we're turning to the charts for a technical look.
In case you're unfamiliar with technical analysis, here's the executive summary: technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
So, without further ado, here's a rundown of four technical setups that are showing solid trading potential right now.
Leading our list of bullish utility trades is $34 billion west coast gas and electric provider PG&E Corp. (PCG) . It's not hard to see the primary trend in PG&E right now -- this stock has been a substantial outperformer in recent months, up more than 22.7% on a total returns basis since shares bottomed back in early December. Don't worry if you've missed out on that price move; shares of PG&E look primed for another leg higher from here.
That's because PG&E is currently forming an ascending triangle pattern, a bullish continuation trade that's formed by horizontal resistance up above shares at $68, and uptrending support to the downside. Basically, as this stock pinballs in between that pair of technically important price levels, shares have been getting squeezed closer and closer to a breakout through the aforementioned $68 price level. When that happens, we've got our buy signal.
Relative strength, measured by the indicator down at the bottom of PG&E's price chart, adds some extra confidence to upside in shares. That's because relative strength has been in an uptrend of its own since late January, indicating that this stock is still outperforming in April. Shares are within grabbing distance of their $68 price ceiling right now -- once they crack that resistance level, it's time to join the buyers.
American Electric Power Co. Inc.
We're seeing the exact same price setup in shares of American Electric Power Co. Inc. (AEP) , a $33.6 billion electric utility with operations across 11 states. Like PG&E, AEP is forming an ascending triangle pattern, and the breakout level just coincidentally also happens to be at the $68 level in this stock.
What makes that $68 price so important for AEP? It all comes down to buyers and sellers.
Price patterns, like this ascending triangle setup, are a good quick way to identify what's going on in the price action, but they're not the ultimate reason shares look attractive here. Instead, the "why" is driven by basic supply and demand for AEP's shares themselves.
The $68 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $68 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Shares closed within a few cents of $68 yesterday -- wait for a material breakout through that price level before you pull the trigger on this trade.
WEC Energy Group Inc.
You don't have to be a trading expert to decipher what's going on with shares of $19 billion utility stock WEC Energy Group Inc. (WEC) . Instead, the price action in this big Midwestern utility is about as simple as it gets. WEC has been a "buy the dips stock" since shares bottomed back in November, and they're showing traders another buyable dip this week.
WEC Energy's price pattern is an uptrending channel, a basic price pattern that's formed by a pair of parallel trendlines that identify the high-probability range for shares to stay stuck within. Put simply, every time WEC has touched its trendline support level at the bottom of the channel, traders have gotten a low-risk, high-reward opportunity to buy more shares. And WEC is bouncing off of support for a sixth time this week. That's our buy signal.
Actually waiting for that bounce is important for two key reasons: It's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring WEC can actually still catch a bid along that line before you put your money on shares.
Meanwhile, South Carolina-based SCANA Corp. (SCG) has been a less attractive utility stock lately. Shares have diverged from the rest of the sector in 2017, shedding about 9% of their market value since the calendar flipped to January. But that could be about to change. SCANA is looking "bottomy" this spring...
SCANA Corp. is currently forming a short-term version of an inverse head-and-shoulders pattern, a bullish reversal setup that signals exhaustion among sellers. The setup is formed by two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal comes on a move through SCANA's neckline. That's at the $66.75 level, the price tag where shares just happened to finish Monday's trading session.
If shares can catch a bid in today's session and move meaningfully above the $66.75 level, it looks as if the reversal is kicking off. Because it's a short-term trading pattern, SCANA's price setup only comes with short-term implications once that breakout happens. That said, don't underestimate the significance of a push higher here: A breakout through $66.75 would coincide with a breakout through the top of the downtrend that's been haranguing shares this year (the thin red dashed line on the chart above). Wait for SCG to clear the distance to $67, then it becomes a buy.