XLU - Opportunity in Utilities?
I'll let you decide if this trade is right for you. I'll explain the fundamentals and the opportunity that the technicals are telling us.
As you know I love when technicals and fundamentals come together. This makes for a powerful combo to put money to work.
XLU - The Fundamentals
Understanding the Utilities Sector
What is the XLU?
XLU is the utilities sector ETF (exchange traded fund).
Utilities include large companies that offer multiple services such as electricity, natural gas or water. Some utilities rely on clean and renewable energy sources like wind turbines and solar panels to produce electricity.
Utilities typically offer investors stable and consistent dividends, and typically less volatile relative to the overall equity markets.
As a result, utilities tend to perform well during recessions and economic downturns.
Because utility stocks pay reliable dividends, investors often favor them over lower-dividend paying equities. During the last financial crisis, the Federal Reserve cut interest rates to stimulate the economy.
Essentially…utility companies are a defensive choice for investors during macroeconomic downturns.
If you believe the US is set to begin growing with a booming economy, this may not be the time to invest in XLU.
However, if you believe the Fed will beginning slowing rate hikes or even lowering rates as a result of a stalling economy…or as a result of say….a banking crisis….then XLU might be something to look into.
Now the fun part!
XLU - The Technicals
Chart of XLU, 3D
No lines. No arrows or bias.
Same chart but this time with my analysis…
Note what happens EVERY March, noted in the red boxes. Price makes an intermediate bottom.
Note what happens EVERY June.
This is cyclical and predictable. I’m a buyer here in the $65-$66 area.
Now let’s look at the percentage increases each cycle.👇
Each cycle from trough to peak:
20.15%, 21.59%, 22.27%
Average: 21.3%
IF you believe we just saw another trough in March…and IF we see the average price gain that we saw over the past three intermediate cycles, that would put a price target at $77.20.
So there you have it. XLU in a nutshell.
Eric
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