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     Kubang Celebrity Bewarse Username: Kubang Post Number: 39408 Registered: 09-2011 Posted From: 161.141.1.1 Rating: N/A |
The utilities sector isn’t always the obvious choice as an equity-market hedge. It’s known as a “defensive” sector, since its revenues aren’t as sensitive to changes in the economy. But right now… my Cycle 9 algorithm is telling me that the SPDR Utilities Sector ETF (NYSE: XLU) is the best way to hedge against falling stock prices. I think a lot of that has to do with the utilities sector’s sensitivity to interest rates. As a notoriously capital-intensive business, utilities companies typically carry a lot of debt. That debt becomes more expensive as interest rates rise. And this eats into profits – either in reality or, at least, into investors’ expectations. So naturally, the utilities sector has been out of favor for some time now, as rates on 10-year Treasurys have marched all the way from 1.4% to 3%. Get this… Since July of 2016, when rates bottomed, the utilities sector (XLU) is down 1.7% – while the average return of the remaining eight sectors is a solid 24%! And while five of the nine sectors we track have recently slid into downtrend status, the utilities sector was the first to go, back in December, and has spent every day in 2018 in this downtrend status – making it a potential “short,” according to the rules of our system. More recently, the utilities sector has notched higher prices – climbing from $48 to $54 since the mid-February bottom. This gives us a favorable entry point for a short position. The general character of the recent rally has been choppy and timid. And it was likely helped by a short-term easing of interest rates, which pulled back to a low of 2.7% as April began. All told, if the broad stock market remains weak it will roll over and re-test this year’s lows – and the utilities sector will go down with it. It’s time to add a hedge… Action to Take: Buy to open September 21, 2018, $51-strike put options on the SPDR Utilities Sector ETF (NYSE: XLU) at the market. The current ask price (where you can buy at the market) is sitting around $1.64. I recommend buying this contract up to a maximum price of $1.90. Note: It’s been a while since we’ve bought a put option, rather than a call option. Ignorance is bliss |