The focus of my Seasonal Forecaster newsletter is on short to medium-term high probability trading. But no prudent trader would risk his or her entire portfolio on speculative trades. We regularly siphon off profits and place them into more conservative, longer-term trades, with a focus on steady growth or income.
One of the best strategies for investing siphoned profits is buying conservative stocks and reinvesting the dividends. Perhaps some utility stocks, Master Limited Partnerships, and certainly some quality industrial and basic consumer staples stocks usually make good choices.
Now if you are going to implement dividend reinvestment for the purposes of long-term capital preservation, income, and some potential for growth, you want to find stocks paying steady, preferably growing, dividends, and chart setups with features like pullbacks to long-term trendlines.
In the interest of diversification, and convenience, we can also consider certain ETFs. Like with stocks, it would be great to pick up an ETF with both dividend and price growth potential. One ETF we might consider is XLU.
XLU, the ETF based on the Utilities sector, has pulled back to its longer-term trendline on the weekly chart. Focusing on this aspect the utility stocks, or at least this ETF, are likely to rebound. Certainly, the economy, interest rates and more can play a role in how the utility stocks actually perform. But this ETF has price growth potential. That’s one good requirement for a dividend-investment plan.
XLU is currently yielding 3.7%. For dividend reinvestment, we would like to see steady growth in the dividend. XLU’s dividend has been erratic, but seems to stick in the 2-4% yield range.
But would this actually be a good time to buy XLU? Ah, here is where seasonal analysis can give perspective.
XLU seems to do well each year unless there is some overall market pullback. But the losses during recessions, such as the 2001 and 2008 recessions, can be large.
Notice there is about 7 years between the 2001/2 and 2008 losing periods above. Do you remember my recent article called What Might September Bring?, where I pointed out the approximately 7 year cycle of sharp drops around the September time period? How does XLU hold up through those market drops? Going out to a monthly chart shows XLU could easily drop significantly if the overall market takes a hit, especially a 7-year cycle collapse.
In summary, if you are thinking about loading up on utility stocks for income, or especially the XLU ETF, you may have significant downside risk. You have to decide how likely any significant market selloff is because XLU is capable of sharp drops in a short amount of time.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
By Gregg Harris, MarketTamer Chief Technical Strategist
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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