Over the last decade, investors have become accustomed to low interest rates. In addition, some of those same investors have remained somewhat fearful of equities. This combination has caused what we believe is a bubble in the “income trade”. In search for yield, investors have moved from money markets and CDs to bonds, publicly traded REITs, utility stocks, and consumer staple stocks. This has caused valuations to balloon in these areas. Because of this, we have been short utilities in particular in two of our strategies. It’s been one of our tougher trades as yields remain low and these stocks continue to move higher. While the valuation makes no sense currently, we’re not sure when the trend will end. However, utilities having a technical set up that may be worth watching as they could fall over the short-term. We are currently long the Proshares Ultrashort Utilities ETF (SDP) to take advantage of a drop in utilities. Keep in mind, this moves 2 times the opposite of the utilities index. At least, that’s the objective.
The chart of the utilities ETF (XLU used in this example) shows a potential double top along with a weakening RSI and a rolling over of the MACD. While there could be a minor pullback in an uptrend, we would be looking for a bigger move down possibly of at least 10%.
Clients of ECM are currently long SDP in the growth strategy and/or the aggressive strategy.