Savvy investors move back into these utilities

Volume patterns suggest these stocks are good buys for yield- and safety-oriented buyers.

By Mar 8, 2012 3:12PM

Image: Natural gas plant (© Kevin Burke/Corbis)By Tom Aspray

As I noted in January, seasonal analysis indicates that the Select Sector SPDR - Utilities (XLU) "typically tops in late December and bottoms in March." There were also technical signs at the end of 2011 that the best-performing sector in 2011 (up 14.8%) was forming a short-term top.

Even though XLU is down just under 3% in 2012, individual utilities like Dominion Resources (D), which is the ETF's second-largest holding, is down 4.9%. Dominion pays an annual dividend of $2.11, and at the end of 2011, it was yielding 4.02%. Following the correction, it now yields 4.20%.

These two gas utilities saw large volume increases on Wednesday and closed strong. This suggests that once again, the big money is moving back into these utilities stocks to capture the attractive yields and capitalize on more defensive plays.

Click to enlarge

Chart Analysis: The weekly chart of the Select Sector SPDR - Utilities (XLU) shows the December high of $36.27 as well as the decline to a late-January low of $34.14.

  • XLU is the middle of its weekly trading channel, lines a and b. The panic selling last August took XLU to a low of $29.45
  • There is next resistance at $35.20-$35.40 and then at $36.00
  • Seasonal trend analysis shows that XLU typically tops in late December and bottoms near March 16 before rallying into early June
  • There is a secondary high in early September and then another low in the middle of October
  • The daily relative performance, or RS analysis (not shown), has moved back above its weighted moving average (WMA)

Click to enlarge

National Fuel Gas Company (NFG) is a $4.05 billion New-York-based diversified energy company. It pays a dividend of $1.42 for a yield of 2.9% and peaked in early November at $64.19.

  • NFG has bounced from the February lows at $46.85 (line b) and has short-term resistance at $51.50, line a
  • A move through this level should signal a rally to the 50% Fibonacci retracement resistance at $55.60, which is 14% above current levels
  • The RS line is trying to form a short-term bottom, line d, and a move above its prior peak would be positive. Longer-term resistance is at line c
  • The volume on Wednesday was 3.4 million shares, almost five times the average and the on-balance-volume (OBV) has moved through its downtrend, line e

WGL Holdings, Inc. (WGL) is a $2.09 billion gas utility company based in Washington D.C. It currently pays a dividend of $1.60 to yield 4%. WGL peaked at $44.99 in late December.

  • WGL has dropped back to the November lows, line f, and support in the $39.90-$40.20 area
  • There is further support now at $38-$38.60
  • The RS line has just broken its downtrend, line g, but shows no clear signs yet of a bottom
  • The volume on Wednesday was 1.34 million shares which was 4.5 times greater than the daily average. This has pushed the OBV back above its WMA
  • The weekly OBV (not shown) is likely to close back above its WMA this week

What It Means: The stock index futures were sharply higher early Thursday, but there are no clear signs yet that the correction is really over. A higher close both Thursday and Friday would be an indication that the correction is really over.

The volume surge in these two utilities and potential bottoming formations makes them attractive for those who are underinvested in stocks. The higher yield makes WGL the favorite of the two.

How to Profit: For WGL Holdings, go long at $40.28 or better with a stop at $38.24 (risk of approx. 5%). On a move above $42.25, raise the stop to $39.76.

For National Fuel Gas Company, go 50% long at $48.34 and 50% long at $47.92 with a stop at $46.48 (risk of approx. 3.4%). On a move above $51.55, raise the stop to $47.16.

See alsoThe 4 Key Seasonal Trends for 2012

Find all of Tom's market comments by bookmarking his columnist page.

Tags: DNFG


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