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The Dow Jones Industrial Average recently suffered its quickest 10% drop from an all-time high since 1928, while the S&P 500 Index slumped even more.
With the market having pared some losses, is this an opportunity to buy, or is it time to sell before things get worse?
We discussed the (surprising) answer to this question at length here, but it’s safe to say that most investment professionals are as confused as the average investor: To wit:
• J.P. Morgan: “Bull market has not peaked yet” — CNBC, Feb. 12
• Morgan Stanley: “The bull market is in the process of topping out” — CNBC, Feb. 7
Is the bull market over or not, buy or sell?
The low-risk trade
Here is one trade that probably presents less risk and more upside potential regardless of what the broader market does.
Last week’s Profit Radar Report recommended buying the Utilities Select Sector SPDR ETF XLU, +1.71%
Yes, utilities sound boring, but the XLU chart is everything but boring.
The monthly chart, below, shows XLU at the bottom of a well-defined trend channel, with support at 47.60.
From the Nov. 15, 2016, high at 57.23 to the Feb. 6 low at 47.37, XLU lost 17.2% of its value.
At the Feb. 6 low, 43% of XLU component stocks traded at 52-week lows, 32% traded near 52-week lows and all components traded below their 50-day simple moving average (SMA).
The daily chart shows that XLU became extremely oversold Feb. 8, which marked the closing low.
The only missing ingredient for strong bullish bets is a bullish divergence. A bullish divergence occurs when price falls to a new low, but momentum or breadth doesn’t. This is often an indication of underlying strength.
Absent of a bullish divergence, XLU could relapse once more and carve out an even better buying opportunity.
Also, XLU’s dividend yield of 3.66% makes it easier to stomach any short-term pullbacks. XLU’s most bullish seasonal period of the year starts in early March.
The top five holdings of the Utilities Select Sector SPDR ETF are:
2. Duke Energy DUK, +1.64%
3. Dominion Energy D, +1.08%
4. Southern Co. SO, +1.93%
5. Exelon EXC, +1.89%
What about the S&P 500?
For anyone plagued by uncertainty, the XLU trade is a lower-risk option to gain exposure to equities.
For those holding a sizeable S&P 500 position, the S&P 500 SPX, +0.72% is near a make-it-or-break-it level, which should tell whether we’ll see a relapse to test the panic low or new all-time highs. More details here: S&P 500 update — decision time.
Simon Maierhofer is the founder of iSPYETF and publisher of the Profit Radar Report. He has appeared on CNBC and FOX News, and has been published in the Wall Street Journal, Barron’s, Forbes, Investors Business Daily and USA Today.