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The Sleuth Hello again, Sleuths, When I first wrote to you about the weakness I saw in the Dow Jones Utilities Average, the index was testing its 200-day moving average. Since that time, the Dow Utilities has risen and fallen. As I write this column, the index is once again challenging its key 200-day long-term support line. The ups and downs of the last month have resulted in this averaging trace out the right shoulder of a head and shoulders chart pattern. The neckline of the head and shoulders pattern is roughly in the area of the 200-day moving average. Sleuthers, this sector is weak! It might bounce again. But I’m telling you, a good stiff market wind is likely to shut the power off on this corner of the equities world. My last Technical Tuesday column two weeks ago was a perfect time to take a position on the short-side in utilities. However, given the way the average has traded, there looks to be more downside ahead for this sector. So, if you don’t know how to attempt to profit from the potential weakness in this sector, let me give you some different trading or investment approaches to consider. ********************************* 109% Average Gain for 2006 Outstanding Investments has just been rated the No.1 top performing financial advisory for the past five years...and it’s no wonder why. Justice Litle has led his subscribers to a whopping 109% average gain for 2006, during the same period where the Dow gained a measly 1% and the S&P 500 gained just 4%. Now, He’ll show you how the next big energy shock could make you 5 times richer... ********************************* First, you can simply buy a put option contract on the index itself. That’s the purest play. But if you aren’t an options player -- or if you don’t find these options that attractive (they’re not that liquid) -- there are a number of other avenues you could consider. One approach is to short one or more of the stocks of the companies that comprise the Dow Utilities. As I mentioned in my February 28 article on this sector, there are fifteen companies in the Dow Jones Utility Average. Those companies are: American Electric Power Co. (AEP:NYSE) If shorting is not your game -- or if you would like the leverage or clearly limited risk offered by the options market -- you could buy puts on one or more of these stocks. All of them offer options. In the interest of full disclosure, I should mention that I suggested in the March 7 issue of MST Trader that subscribers add CenterPoint Energy to their short-side Watch List for a possible put play. If you are seeking more of a play on the entire utilities industry -- where you can take a position in a single instrument that closely replicates the performance of the sector -- there are a number of other possibilities you can choose from. All of the underlying securities I am going to mention are traded on the American Stock Exchange. One of these securities is what’s known as a HOLDRS -- which stands for Holding Company Depository Receipts. These Depository Receipts are designed to replicate the performance of specific companies within a particular industry, sector, or group in one security. According to the American Stock Exchange’s website –- http://www.amex.com -- there are currently seventeen different HOLDRS traded. These HOLDRS are liquid and are actively traded. ********************************* 13 of 14 Winning Picks Incredible gains can be yours by finding the trends that shape the market... You could see gains as big as 62% in 24 hours...or you pay nothing. If you have 10 minutes a day, you can start making explosive gains like 53.3%, 62.1% and 95.2%. Read this report to find out how... ********************************* One of these securities is the Utilities HOLDRS (UTH:AMEX). The UTH consists of the stocks of the following nineteen companies -- most of which you will notice are also part of the Dow Jones Utility Average: American Electric Power Co. (AEP:NYSE) You have several different alternatives here. One possibility is to simply take a short position in the Utilities HOLDRS itself. What’s nice about shorting the UTH is that -- unlike stocks that trade on the New York Stock Exchange -- it is not necessary to wait for an uptick in the price of the security for your open short order to be executed. Alternatively, you can pinpoint one or more of the nineteen stocks in the UTH you think to be particularly weak and establish your short Again, if you are not comfortable with the concept of shorting -- or the theoretical unlimited risk inherent in this method of trading and investing -- you can purchase a put option. You can either purchase a put on the UTF itself or on any of the individual UTH components listed above. In case I haven’t described enough alternatives for you, there is yet another way to bet on the downside in utilities. There are a few other utilities-specific investment vehicles known as Exchange Traded Funds (ETFs as they is commonly referred to). Unlike the Utilities HOLDRS -- which is composed of a fixed list of stocks -- the companies contained in an ETF change over time. Thus, these securities are is more analogous to a mutual fund than a market index. However, Exchange Traded Funds share two important characteristics with the HOLDRS. First, all of the ETFs related to the utilities sector may be shorted without an uptick. Second, all these ETFs have options. There are several Exchange Traded Funds traded on the American Stock Exchange that are specifically tailored to the performance of the utilities sector. One series of ETFs is known as iShares. Thirteen of these iShares that trade on the American Stock Exchange were created by Dow Jones & Company to represent the performance of different market sectors. One of these iShares is the Dow Jones U.S. Utilities Sector Index Fund (IDU:AMEX). What is interesting about the IDU is that its results are intended to correlate generally with the Dow Jones Utilities Average. So, if your intent is to find a security that most closely tracks the performance of the Dow Utilities, the IDU is probably your ticket. ********************************* Prepare for the Biggest One-Year Loss of Wealth in World History ...But you can PROTECT YOURSELF – and get rich off these five recommendations set to go up as home prices drop. Read all about them in this FREE special report. ********************************* Another popular ETF created to track utilities industry stocks is the Utilities Select Sector SPDR (XLU:AMEX). The Utilities Select Sector SPDR is one of nine different Select Sector SPDR Funds that trade on the American Stock Exchange. These funds consist of a portfolio of stocks designed to reflect the performance of a particular sector’s companies within the S&P 500 Index. There are two other Exchange Traded Funds trading on the American Stock Exchange intended to reflect the general performance of stocks in the utilities industry -- the PowerShares Dynamic Portfolio (PUI:AMEX) and the Vanguard Utilities VIPERs (VPU:AMEX). Both of these Exchange Traded Funds have options. However, both of these securities have much lighter volume than the ETFs or the HOLDRS mentioned above. And the options on both of these ETFs lack the liquidity of the alternatives described earlier. So, you would be better off sticking with other, more actively traded investment vehicles. There may be other ways you can play the vulnerability inherent in the utilities sector. However, I have listed a host of possible choices from which you can design a successful short-side strategy. Just decide upon the method with which you are most comfortable, pick a good entry point, choose you risk threshold, and select a profit target. Then, go after it -- before they shut the power on these utilities stocks. Trade well, Mark Bail Editor, MST Trader Alert Gunner’s Note: Mark Bail’s Momentum, Strength and Trend indicators can help you net gains that beat the best Wall Street traders by 450%. It’s the one repeatable, 100% automatic, no-judgment-calls system for profiting from the stock market that blows away any other system of analysis out there over time. Mark’s has hit streaks with extended accuracy rates of up to 92% help him make good on this guarantee: Over the next two months, you will have the chance to pull in 4 1/2 times what Wall Street's "ace" stock traders make...or your money back. |
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Mark Bail has spent several years studying the financial market as well as running several options, equities, and mutual fund newsletters... <click here for full bio> |
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