When markets get bad, those that must stay invested often turn to utility stocks as a safe haven. But with artificial intelligence requiring such huge power requirements, the landscape shifted for utilities. Here's how we handled a recent trade in a utilities ETF and why we shifted out of it early.
Not Your Father's Utility Stock
Utility stocks are usually not as correlated to the general market as your average growth stock. But for the Virtus Reaves Utilities ETF that's not necessarily true anymore. Consider that in a big six-month run-up prior to Jan. 27, the S&P 500 was up a solid 12% while UTES tripled that performance. Indeed, the top three utility stock holdings for the ETF included Vistra, Constellation Energy and Talen Energy. All three had more than 100% gains during that period.
What was important about Jan. 27? That was when China-based DeepSeek announced a potentially more efficient AI that hit most AI stocks hard. UTES itself dropped 10% on that day — much more in line with a Nvidia reaction than a slow sleepy stock.
When market indexes put in a near-term February top, UTES did as well (1). Interestingly, UTES did provide some protection on the market downturn. As bad as the indexes got as tariff news roiled markets, the relative strength line showed utility stocks outperforming the S&P 500 (2).
A Tentative Increase Of Exposure
A level of outperformance continued even when the market turned. One session after the April 22 follow-through day, UTES was already climbing back above its 50-day moving average line (3).
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The market started piling up proof points of its strength. Getting above its 21-day line, surpassing the high of April 9, getting above its 50-day line were all positive signs getting checked off.
But we wanted to stick with stocks and ETFs that weren't moving around too much on a daily basis and UTES fit the criteria. Comparing the average true range (ATR) of UTES to a nonleveraged market ETF like the SPDR S&P 500 ETF, the ATRs were similar.
After a final shakeout and upside reversal (4) we started a position in the utility stock ETF (5) on SwingTrader just as markets surpassed their 50-day lines.
Why We Exited UTES
We are still being careful since market indexes remain below their 200-day moving average lines and are potentially facing resistance at that level.
Before heading into the weekend on May 2, we trimmed the position in UTES to take some profit and reduce exposure (6). That did mean we had less exposure when UTES moved nearly 2% on Tuesday, but we still had participation with a 5% position (7).
We also faced an important strategic decision. As more stocks are breaking out and breadth increased, did we want to only rely on low ATR stocks? That's not usually going to result in market outperformance. So we've been booking profits in some of our early entries in low ATR positions to make room for faster-moving stocks if the market continues to perform well. UTES exited Thursday (8) as we geared up for another weekend and the potential market-moving news events that might entail. If the indexes surpass their 200-day lines next week, we'll have more dry powder for more aggressive positions.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
