08.29.2022
Is Southern the company to keep?
Key Takeaways
XLU is currently the strongest sector according to my relative strength work.
One of XLU's strongest stocks is Southern Company (SO).
SO is offering a low-risk entry point on the daily chart, but the larger time-frame charts are arguing against that.
Should SO's price offer us a better setup on the larger time frame charts and should XLU still be the strongest sector at that time, then our initial price target would likely be in the area of $87.50.
Introduction
With the major averages following through to the downside, going long right now is not for the faint of heart. The Utilities ETF (XLU) is not a place I look to for opportunities often. It is the 9th smallest sector of the S&P 500 ETF (SPY), just bigger than Real Estate (XLRE) and Materials (XLB), and it only moves $2.84 per week on average as measured using Wilder's the 13-week Average True Range. As of today, 08/29/2022, my relative strength work identifies XLU as strongest of the 11 S&P large cap-weighted sector ETFs relative to SPY. XLU is just 2 weeks and less than 3% from its last all-time high. Price is in an uptrend with positive momentum. Regarding breadth, XLU has 29 holdings. More than 86% of them, so 25 of 29, are above their upward sloping 40-week simple moving averages.
One of the strongest companies in XLU is Southern Company (SO). On today’s close, (SO) printed a 52-week closing high relative to SPY. According to their website, SO “is a leading energy company serving 9 million customers…” They are involved in numerous areas of energy generation and distribution. SO is one of the largest producers of electricity in the United States. They deal in natural gas, electricity, carbon-free nuclear energy, renewables, fiber optics, telecommunication services, and energy efficiency and storage technologies. SO is the 3rd largest company in XLU, at 7.77%, just below Nextera Energy (NEE) and Duke Energy Corp (DUK). With the stage now set, let’s examine SO's charts.
Looking at the daily chart, we see price rallied from $62 to $78 for 2 months during mid-February to mid-April. Price then went sideways for 2 months, followed by a nasty pullback which retraced more than two-thirds of its advance. The selling continued until we saw the selling climax on June 17th, the same day SPY bottomed. The RSI became oversold, though the relative strength line held up nicely. Since its June low, price has been in a steady uptrend. Price broke above its earlier high around $77, marked breakout on the chart, 2 weeks ago. Price continued to rally from the breakout level and eventually price printed a doji candle as the RSI became overbought around $80.50. Since that high, price has pulled back to that $77 breakout level and the lower line of its uptrend channel. In addition to offering a very-low risk entry point, SO’s relative strength line printed an all-time high.
SO Daily Chart. Click to enlarge.
Zooming out to a weekly chart, a few things jump off the page. The start of SO’s relative strength began in November of 2021 and remains trending higher. In March of 2022, price's rate-of-trend began to accelerate. Most recently, 2-weeks ago, price pushed higher towards the top of its 8-month trend channel. It has since turned lower. The $77 price level which looks so attractive on the daily chart suddenly loses some of its appeal from a risk perspective. $71, which was the pre-Covid high, or a few dollars lower at the channel’s lower trendline looks to be a more appealing entry. Momentum is not overbought and holding steady. That is a check for the bull case. The decision is difficult. Do we take a small starter position with the risk well defined below $77, or do we patiently wait to see if price will stabilize and correct through time above $77or fall lower towards the upper $60s?
SO Weekly Chart. Click to enlarge.
With the daily and weekly charts each telling a different story about risk, let’s try zooming out again and consider the message from SO's monthly chart. Looking back in time, we see price had a move higher from 2009 to 2012. From there, price went sideways for 7 years from 2012-2019. Price broke out in 2019 and its uptrend continued until the Covid-crash took price down to confirm its previous resistance/breakout level as support. The rightmost section of this monthly chart shows price above its current uptrend channel. Generally this throwover condition means we are due for a correction through price and/or through time.
SO Monthly Chart. Click to enlarge.
The positive is that price remains above it's pre-Covid price high of 71. I can hear the commentary now. $71 is the big picture level. Below the pre-Covid high of $71 and the bull thesis is invalidated. Yes and no. Yes, the breakout is invalidated, at least temporarily, though the uptrend would remain valid. The lower line of the trend channel is what I am interested in. To me, the bull case will be invalidated more in the upper $60s with a break of that lower channel line. The exact price depends on how long it takes price to move lower. In addition to price being extended above its current trend channel, the lower indicator shows the distance of price from its 12 month simple moving average. While price can certainly move higher from here, we can see that the 13% level has been where we have seen some mean reversion from price in the past. This argues for caution. Momentum looks to be trending helpfully higher and is not yet overbought. That is a check for the bull case.
So what is a market participant to do with the monthly and weekly charts showing price to be extended while the daily price sits at potential support? It's all a matter of time-frame. The higher timeframes get the most weight. The primary trend, as shown on the monthly chart, looks due for a bit of mean reversion down to $70 or even the upper $60s. The secondary trend, as shown on the weekly chart, is also due for a bit of mean reversion. There is certainly a chance that the bulls can hold price above $77, but with only the minor trend on the daily chart saying buy there is more risk here than I am intersted in taking.
Looking ahead and planning for the scenario where price gives us a better entry and XLU remains one of the only places to hide, let's consider initial price targets. The weekly chart identifies the 161.8% Fibonacci extension of the pre-Covid high and subsequent crash as $89. On the daily chart, the next Fibonacci extension from the 2 month mid-February to mid-April move is around the $86.75 level. That matches up with the top of the upward sloping trend channel. Taking a horizontal Point & Figure count, the conservative target is $88. That gives us a mean target of $87.62 and a median target of $87.37. Let's say $87.50.
SO Pont & Figure. Click to enlarge.
It seems then that the answer to the question, "Is Southern the company to keep," is not right now. If XLU retains its relatives strength and if SO's price gives us a lower risk entry, then we might consider taking a position with a target in the area of $87.50.
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