Wednesday, September 18, 2013

Getting Shocked by Utility Stocks

By Dennis Miller

Retirees' portfolios need to be defensive, meaning they minimize risk but still have the potential for growth and income. Historically, this meant including a few widow-and-orphan stocks in your retirement portfolio....public utilities with nice dividends.


Utilities experience little volatility, their dividends are solid, and the demand for their product is constant, regardless of how well the economy is doing. Government regulation also gives them a leg up, since utilities face little competition. They set their rates, consumers pay up with little fuss because they have few alternatives, and the utilities turn a profit.

So, we at Miller's Money Forever wondered, is it time to add one or two utilities to our own portfolio? As I talked through the idea with our chief analyst, I could hear him clicking away on his keyboard in the background. A little research on a couple of utilities quickly put things in perspective. Had we bought in to Exelon (EXC) in early May at the wrong time, we almost would have been stopped out by a 20% trailing stop, since the stock fell as far as 19%. We were both shocked.

But that's only one utility. What about the sector as a whole? With a few more clicks, we learned that the Utilities Select Sector SPDR (XLU), a $5.4-billion exchange-traded fund of utilities, had fallen as far as 11% since the beginning of May. That's an enormous move in such a short period of time for what many consider a staple sector for retirement portfolios.

Wait a minute here! Utility stocks are supposed be the ultimate safe investment. They didn't earn the nickname "widow and orphan stocks" for being volatile, so what the heck happened?

History Does Not Guarantee Future Performance

 

We ran an in-depth analysis and came up with a bit of a history lesson for me to pass along. Let's start with where defensive stocks stood prior to the rapid rate increase in Treasuries. With yields near record lows, investors piled in to dividend stocks in search of income. But they didn't pick just any type of stock—they specifically chose defensive stocks with a beta of less than one. For a quick review, a beta of one means a 10% move in the stock market should theoretically move the stock 10%. A beta of 0.5 means a 10% move in the market should move the stock only 5%.

In addition to retail investors, more sophisticated analysts suggested moving in to these stocks as well. One of the most common Wall Street valuation models examines three primary factors: dividends, beta, and the US Treasury rate. When the beta and Treasury rates are low and the dividend is high, a stock is shown to be more valuable. Based on this model, a stock's value is more dependent on Treasury rates and the dividend than what often drives value: cash flows and growth.

In a nutshell, because there are no safe, decent interest-bearing investments available, many billions of dollars went into utility stocks. In some sense, utilities began to act like bonds. And when interest rates rise, bond prices fall. As a result, what was once considered the definitive stable investment is now interest-rate sensitive, just like long term bonds.

In order to get a better visual of what's been happening, we tracked XLU's performance since May 1—a period of rapidly rising rates—and compared it to a theoretical beta-based utility performance as well as the S&P 500. With a beta of 0.63, XLU should move 6.3% whenever the market moves 10%. In many situations beta works well, but unfortunately, it doesn't capture every risk, including interest-rate risk.


The blue line traces the return on the S&P 500. The green line depicts how XLU theoretically should have moved based on its beta. The red line shows how it actually performed. Note the enormous difference, bottoming out as far as 11.2% down.

Although beta is typically used as a back-of-the-envelope measure of risk, it's not doing a particularly good job for utilities in a rising-rate environment. And while the S&P 500 has recovered from June's turbulence, utilities are still down for this period.

After I saw the data, I asked what we should expect in the future. While I suppose it makes little difference if a retiree is holding utility stocks for the dividends, utilities will likely lose value as interest rates rise. That could be a bit unnerving.

This could be a real problem for retirees, as it's common practice for investment advisors at major brokerage firms to put their more conservative investors in utilities. A seasoned veteran once told me that no broker ever got sued for putting clients' money into utilities. I wonder how many brokers and investment advisors have noticed the shift happening in utilities with higher rates.

In light of rising interest rates, we have refined our criteria for selecting solid and safe investments for the Money Forever portfolio. Unfortunately, not everyone was has caught on. Take a look at your portfolio to see whether you need to trim down your utilities exposure. Should the market crash, I'd rather be holding a utility than General Motors, but at the same time, if interest rates keep going up utilities will feel the pain.
I discussed this issue—as well as others facing retirees—in a very recent and timely online event called America's Broken Promise: Strategies for a Retirement Worth Living. This free event’s all-star cast explains the unique challenges retirees face today—challenges far different from what we were raised to expect.

The presentation is hosted by my colleague, David Galland of Casey Research, and features John Stossel, formerly on ABC's 20/20 and now with Fox Business Network, David Walker, former Comptroller General of the United States, Jeff White, President of American Financial Group, and me of course.

This is the one event you must see to ensure you retire on your own terms. Use this link to find out more and to sign-up.




Monday, September 16, 2013

The 30 Minute Breakout Trading Strategy.....Free Video Download

Have you tried to trade the first 30 minutes of the day before?

A few benefits to trading the open are:

High Levels of Liquidity Targeted Time Period to Trade You Don't Stare at a Screen All Day

While those all sound great, the downside is that the first 30 minutes can be extremely difficult to trade due to the fact that there is so much liquidity in the markets (especially after active overnight sessions).

With all that in mind, Todd Mitchell just recorded a video on his 30 Minute Breakout Strategy for trading the first 30 minutes of each day.

You will learn:

  *   How to Setup the Trade
  *   Where to Set Profit Targets and Stops
  *   3 Examples of this trade from last week (recorded from live market)


Tap Here to Access the 30 Minute Breakout Strategy,PDF Download of the strategy is included.

See you in the markets,

The Stock Market Club

Get the free strategy now...paper trade it and see for yourself tomorrow. 

Thursday, September 12, 2013

Trading the Trend....Is Your Strategy Working?

This week our trading partner Todd Mitchell is sharing his unique trading strategies and we are finding they aren't for everyone. And, especially not for those people who like to use complicated software or get handcuffed to some "black box" trading system.

But it's a great insight into how professional E-Mini traders place winning trades everyday. You have to watch Todd's free presentation "The Simple Truth About Trends"

Todd proves that the key to pulling money of the markets - whether you're trading stocks, Forex, E-Mini futures or Options - is to trade with the prevailing trend. Yet, most people doing it all wrong. They're missing critical clues in price, getting in too late and not exiting their trade before the trend turns.

However, after watching this free video you'll have more knowledge about the trend than 90% of other traders.

Inside this presentation you'll discover:

- 3 Critical Bullish Patterns in Price
- 3 Important Bearish Patterns in Price
- 3 Little-Known Truths in Trend That Apply in all Markets in all Timeframes
- How to Spot Reversals Before They Happen
- How to Determine the Strength of the Market


There's over 1,000 comments of people raving about this content and I'm certain you'll agree it's one of the best presentations you've watched all year.

Watch "The Simple Truth About Trends" now!

The Stock Market Club


Tuesday, September 10, 2013

The Best eMini Short Cut EVER!

Here's the real reason why E-Minis are the secret money making weapon behind the greatest names in trading.

Let’s be honest, a lot of  the “free” trading videos are a complete waste of time, with presenters blowing a bunch of hot air. Right?

A few folks offer some interesting info but most leave out all the good stuff.

Then there is my good friend and trading partner Todd Mitchell who put together this great video.
In his latest video Todd makes his theory on the eMinis unfair advantage perfectly clear.

1,000's of traders will see the video this morning with many people claiming his free material that is worth much more than other courses they’ve paid for.

That’s why I insist you watch this.

Great content. Simple strategies. Very interesting approach.

Watch "Todd's Emini Success Formula" 

Please feel free to leave a comment and let us know what you think about the video


Ray @ The Stock Market Club





Sunday, September 1, 2013

Is 1,600 the Next SP500 Support Level?

Chart1 (1)
Investors and traders alike are heading into the long weekend with a variety of potential risks facing them. The media has made us aware of the situation that is going on in Syria and that the United States may be planning a military strike.

Since the current Syrian situation arose, we have seen some strong volatility return to U.S. financial markets. The observed volatility has included both realized volatility and implied volatility in many of the various option chains. There are pundits who will surmise a variety of outcomes, but frankly no one knows for sure. Will oil prices spike if military action occurs in Syria? Will oil prices fall on a military action(s)? What will happen to gold? What will happen to risk assets? Will they find Jimmy Hoffa?

We have recently received several emails asking these questions. We have answered them all in the same manner. We have no idea what is going to happen in financial markets for sure. Anyone who says they do does not respect the randomness of markets. We can look at option based probabilities for some clues, but there is no definitive answer.

Instead we want to look at a very powerful tool that is available on most trading software platforms. Volume by price is a powerful tool to determine where key levels are in an index or price chart.

Our complete chart work and set ups for the S&P 500 Index are shown here.



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