When investors face uncertainty in the economy and market, they often resort to a well-known playbook: they play it safe by loading up on bonds, gold, and utility stocks.
Utilities are essential public companies that provide daily necessities—such as water, gas, and electricity—to specific localities. Many of these companies operate as highly regulated natural monopolies, meaning the government allows them to set rates that ensure a stable return on capital, typically between 8% and 10%. This regulatory environment enables utilities to pass costs onto customers, ensuring consistent revenue, even when significant investments in infrastructure are necessary.
Traditionally, utility stocks have been considered extremely safe investments. They often behave like bonds, holding up when other stocks falter. However, utility stocks are sensitive to interest rates, and they tend not to perform well in high-interest-rate environments.
With interest rates expected to be cut soon, investors have begun to jump on the bandwagon and buy utility stocks. As you know, we’ve recently capitalized on this trend with significant profits by timing our entry into this sector.
Traders are confident that the Federal Reserve will lower interest rates by September. The June inflation data provided encouraging signs, and there’s a 93.3% chance that rates will be cut by a quarter of a percentage point in September. There’s even a 6.7% chance of a half-percentage-point cut. This means the market is fully confident that some reduction is on the horizon.
When the market is this certain, our contrarian instincts usually kick in. However, in this case, there’s little reason to doubt the Fed’s likely course of action. Our primary goal is to ensure that we time our entry correctly to ride this wave.
Take a look at the latest XLU chart…
We mapped out our Elliott Wave pattern with a blue line back in May, riding the wave down before reentering with the red line last month. Although both price action lines were slightly off, the overall prediction was remarkably accurate.
Last week, XLU rallied to $75.63, almost exactly the level we predicted for the end of Wave 3, albeit a week earlier than expected. Now, as we anticipate the start of Wave 5 (indicated by the red numbers), today’s drop suggests that Wave 4 is nearing completion.
Utilities offer a relatively safe investment during periods of heightened volatility, and the price action is closely aligning with what we would expect based on Elliott Wave analysis. Combining this with the likelihood of an interest rate cut next month, which would only bolster XLU, makes utility stocks an increasingly attractive option.
Pay up to $1.35 to open this trade.