Is the Party Over in Power Stocks?

The selling in utilities stocks may be another sign that investors are ready to take on risk in the opening rounds of 2012.

Utilities have been among the best performing sectors in 2011. The matchup of relatively low historical volatility and steady dividends in the stocks of this sector was understandably an irresistable combination for traders and investors battered by volatility, persistent weakness in the financials and concerns about Europe.

But in recent days, investors have been heading for the exits in a number of top utilities stocks, sending the Utilities Select Sector SPDRS ETF (NYSE: XLU) tumbling lower for four out of the past five sessions, including Friday. Also pulling back on Friday’s session was the First Trust Utilities AlphaDEX Fund ETF (NYSE: FXU).

Both ETFs are set to open oversold when trading begins on Monday, which historically has attracted buyers in the short term. Note how XLU responded to an oversold pullback in mid-December, rallying for five days in a row after a two-day retreat to oversold levels.

And although FXU has oscillated above and below its 200-day moving average for months (many active investors avoid buying ETFs when they are trading in bear market territory, such as below the 200-day moving average), similarly oversold conditions in the fund in December resulted in short-term gains of more than 3% when new, short-term highs were reached a week later.

Heading into trading on Monday, both XLU and FXU have strong “consider buying” ratings of 9 out of 10.

Traders interested in the component stocks in these funds that are selling-off and pulling back to levels from which they tended to make signficant moves in the short-term may also want to look at stocks like Dominion Resources (NYSE: D) and Northeast Utilities (NYSE: NU). Both stocks are down five in a row, and trading in oversold territory at new, short-term lows. As of Friday’s finish, both stocks have neutral ratings of 6 and 7 out of 10, respectively, and likely will require even further selling before earning upgrades to “consider buying” levels.

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David Penn is Editor in Chief of