Saturday, December 27, 2014

XLU Utilities Weekly Chart New All-Time Highs Overbot Price Extended Investors Buying Dividend Stocks with Total Disregard for Price

The huge move in utilities last week was a surprise since price has gone parabolic for such a typically benign sector. XLU prints new all-time record highs. Investors and traders all have the same idea. They want to invest in the stock market since they see the headline market highs day after day and are flocking into dividend stocks. Each thinks they are smarter than the other with the plan to buy defensive-style stocks (perceived safety) and divvy stocks such as utilities thinking in a market down turn these stocks will cruise along with the dividend and the stock will recover to new highs. They are likely going to be gravely disappointed. A 3% or 4% yield is not attractive if the capital price of the stock plummets -10% or -20% or more lower.

The parabolic move in price creates momentum so this provides utilities additional time at the lofty price levels. The red lines show negative divergence for the indicators over the two-year and near-term couple-month time frames. The green lines show long and strong behavior due to the recent thrust higher so the bulls should be able to keep price elevated, with new highs, in the coming days or week or three (January). At that point, the RSI and MACD line should set up with neggie d and roll price over so watch these two parameters in the New Year to identify the top. In both early 2013 and early 2014 price was above the 20 MA for an extended period and when it corrected price was at or near the 50 MA in only 6 to 8 weeks time. This would equate to XLU retreating to 42-46 as February-March rolls around. If this plays out, the folks dining on the divvy strategy described above will have a sour taste in their mouth.

The utilities will typically roll over first for a substantive broad market downturn but clearly that is not the case now since utes are making new highs with the broader market. This hints that the broad market pull back which is imminent would likely recover unless utilities become weaker quicker. Price is extended far above the moving averages in the chart above so a mean reversion is required. Keystone started to enter the short side on utilities a few days ago and will add to the shorts as time moves along and the chart redevelops due to the momentum thrust last week. The dividend stock bubble continues growing as evidenced by SDY and DVY ETF's. Ridiculously, investors are buying these long dividend plays with total disregard for price. They all will likely have a very sad Valentine's Day. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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