To start, I’d like to thank readers who post questions regarding sectors (NOT individual stocks!!) that might be of interest to a broad spectrum of readers. Today’s blog is the result of one of the long time readers of the blog asking about utilities and pipelines. Please post question and comments on the website if you have such questions.
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A brief market comment
Before getting to the utilities and pipelines question, I wanted to make a quick observation regarding the broad markets. In my first blog of the year (January 3rd) I presented a strong case for a decline in the S&P 500 down to 4600. Here is that blog. I followed that blog up by presenting my usual monthly reading of the risk/reward market compilation called the Bear-o-meter – here. It, too, presented a case for a market decline – although I noted that we are in for a decline, not a crash. As such, the dip should be bought. Is now that time?
My thoughts: Now that my target is being tested (literally as I type this…) – we need to see if 4600 will hold. I am not deploying new cash into the market until 4600 proves as support.
Bottom line: If current support of 4600 breaks, I anticipate the next level of support to come in around 4400. If that level is reached, we start our 3 day count again. My thoughts are that 4400 is likely the “line in the sand” –but first let’s see if 4600 support holds.
Lets move on to utilities. The reader asked if I think there is opportunity in the sector. I’ll look at the BMO equal-weight ETF (ZUT-T) as the model for this commentary. The chart is below. I should note that rising rates are usually unfavorable for utilities – as their main expense is debt. Utilities are not growth companies, and most factors on the revenue and expenses are slow to change. The main change factor for this industry (beyond the “new green deal expenses”) are interest rates. Higher rates increase their expenses.
That aside, the chart below suggests a bit of a triangle (consolidation pattern) is forming for the sector. One is typically wise NOT to buy within such a consolidation. That’s because – when a breakout occurs, it is usually pretty powerful. That’s great if its an upside breakout. But if its to the downside – look out below! Bearish momentum trends suggest the signs are not yet bullish for the sector. As always, the main benefit of this sector is the dividend payout. But a bearish breakdown – I am not predicting one will occur…but IF it were to occur – it could be ugly. And that downside would offset the dividend. To me, this is a 50/50 situation as to whether its a buy or a sell. I don’t trade those kind of odds.
While some of the energy conglomerates have pipeline elements to their businesses – for example Suncor has a US subsidiary with pipleine exposure – there are only 3 true pipelines to look at in Canada. As such, you wont find a pure ETF in the sector. Horizons has a pipeline and energy services ETF (HOG-T) – but its a mixed bag, thus not representative of todays subject. As such, we will look at the three charts of ENB, TRP and PPL below.
ENB (which we hold in our Income Platform) has technical resistance in the mid-$50’s. The stock is hooking up after a brief selloff, and the momentum studies are bullish. ENB has a big dividend at the time of writing… 6.7%. This is a neutral chart, suggesting minor upside but stable pattern. ideal for dividend seekers with lower growth expectations (which is why we hold it in our Income Platform).
TRP has a bit more upside for investors than ENB. The stock has a fair amount of resistance in the mid-$60’s, which is 10% ahead of current pricing. The dividend is about 1% less than ENB at 5.6% as I write this. Momentum studies are hooking up suggesting neartermed upside.
We own Pembina in both our Equity Platform and our Income Platform. Its got a pretty nice dividend at 6.4%. Of note, this pipeline is a double edged sword, of sorts. On the positive side, we have current technical resistance near $42 – which was its pre-Covid support level. The stock failed at this level recently after a nice run from its bottom in 2020. However, we have a bounce – and positive momentum hooks, which imply a return to that $42 level. Should $42 be cracked, the old resistance level of about $48-$50 leaves plenty of upside. That’s the real positive side of this sword.
The negative side of the sword is the diverging momentum trends, which I have marked on the chart below. This is the only pipeline showing such trends. That can be a warning sign of the good times being over. We shall see. For our part at ValueTrend, we think $42 is attainable, but will have to see if it can follow through and break its declining momentum trend before deciding to continue holding the stock.
Dividend players who are comparing pipelines and utilities are best to focus on pipelines right now. The utility sector isn’t showing us which way its triangle will be breaking out. If we see a bullish breakout from that triangle, it would suggest upside. Fundamentals favor pipelines as well, and do not favor the effects of rising rates on utilities.
Finally – for all of my readers: look for the official announcement and release of the Technical Analysis course in the next two days.