Utility Sector idea

Since the significant bottom of 3-9-09, Utility is the relatively under performing S&P 500 sector. This should not be surprising given the traditional business cycle timing. Add the fact that 10 Year Note Yield has been rising.

See the chart of 10 Year Note Yield. Note how the support zone below and resistance zone above has made an in-between zone where the yield can bounce between 3.05% to 3.4%.


US 10 Year Note Yield






Utilities are interest rate sensitive as they are big borrowers.

My thought for a trade is to go long one of the recent better performers in Utility sector and try to hedge the risk by going short one of the recent weaker performers in the sector.

As of end April 09, 14% of XLU (SelecSpdr Utility ETF) is comprised of FPL & SO. For the very short time horizon of 2-4 weeks, my thought is that FPL will continue to gain while SO will continue to lose. Obviously, the bigger market picture can change that view, especially the results of Bank Stress test and Unemployment numbers which are due out this week. That is why I am more inclined to hedge this trade while keeping stop loss targets in place.

The daily chart of FPL shows the breakout from an inverse head and shoulder pattern (shaded rectangle). The rising resistance line (green) is meeting with overhead support at $62. That is the target. Rising red line is the support and stop loss to be placed below it.


FPL daily

The daily chart of SO is declining against a dropping resistance line (red line) and has support at $26.50 which is the target. The stop loss is above the red line.

SO Daily

In both cases, the stops should be adjusted as the position(s) go into profit as they are against sloping trend lines.

I am considering buying Synthetic Combo (long call ATM and short put ATM) in FPL and Selling Synthetic Combo (short call ATM and long Put ATM). Stops are to be placed along with the trade as the position can move quickly.