Power surge
03/20/18

Utility stocks don’t necessarily get a lot of love in trading circles—they’re typically seen as long-term investments, mostly defensive, more attractive for their dividends than their price action.

Last week, though, Utilities were the best-performing S&P 500 (SPX) sector, +2.6% vs. -1.24% for the index. Utility stocks also started out this week with relative strength—down only 0.8% during a broad market sell-off that saw the SPX trading nearly 2% lower around 1:30 p.m. ET yesterday.

American Electric Power (AEP) 7/19/13–3/19/18. Back to the trend line. Daily price chart

Source: OptionsHouse

The above chart of American Electric Power (AEP), an Ohio-based electricity generator and distributer that runs the gamut from coal to hydroelectric, nuclear, solar, and wind sources, might explain why traders sometimes bypass utilities. Despite the overall uptrend, the stock’s price action contains many choppy moves and what looks like a lot of day-to-day “noise”. For investors, though, a 17% gain since December 2016 (which was closer to 34% before the stock started selling off in December 2017) and an average annual dividend of 3.8%1 over the past five years is just fine, thanks.

But given that AEP’s early 2018 downturn brought it just about to the level of the trend line connecting the 2015 and 2016 lows—which does a pretty good job of representing the stock’s overall trend over the past four years—and the fact that it has bounced off the higher low it established in early March may make the stock interesting for traders, too.

A closer look at the more recent price action (below) shows AEP as of yesterday had rattled off eight straight days of higher highs, and seven straight higher closes through Friday. This move took the stock right up to the resistance level implied by the February high (around $67.75, which was also the approximate level of the stock’s January low), which AEP closed above on Friday and traded above yesterday before closing a bit below it. (For reference, AEP was down only around 0.5% yesterday when SPX was down 2% and Utilities were down 0.8%.)

American Electric Power (AEP) 11/22/17–3/19/18. Test of resistance. Daily AEP price chart.

Source: OptionsHouse

Upside penetration of the level would clear the path to the next swing high, the January top a little below $70. AEP’s late-2017 high is just above $78; analyst price targets tracked by Nasdaq range from $70-$79, with an average of $75.2

It wouldn’t be shocking if the stock retraced a few of its steps after staging such a win streak and bumping into resistance, but the recent upswing wouldn’t be negated from a technical standpoint until the AEP traded below the early March low (or at least the longer-term trend line). And then there’s the recent mini-rotation into Utilities. Even if it turns out to be a temporary reaction to recent volatility and uncertainty (outflows from tech and Washington turmoil, perhaps?), it may provide enough juice to boost a stock like AEP, which has formed a significant low and approached a key technical level.

Sometimes the un-sexy areas of the market deserve a second look, even from traders.

 

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1 StreetInsider.com. Dividend History for American Electric Power Co., Inc. (AEP). 3/19/18.

2 Nasdaq.com. American Electric Power Company, Inc. Stock Research - Analyst Summary. 3/19/18.