Until quite recently, dividend payers have led the market higher.
That's because, as the Federal Reserve introduced it's bond buying program they intentionally pushed the yield lower on Treasurys.
In response, investors rotated into dividend paying stocks, in their quest for returns. Therefore utilities, REITs and consumer staples stocks came into favor.
Because these stocks offer reliable dividends they became a kind of 'bond alternative.'
But within the past 10 days or so, bond yields have spiked on 10-year Treasurys to 2.2%—about a 13-month high. That's a 54% increase from the July 2012 low of 1.38%.
In turn, investors who put money to work in these 'bond alternatives' have started to sell. The risk presented by stocks – even dividend paying stocks – was simply too great for some.
At that leads to the current conundrum.
If you're a stock investor and not someone seeking 'bond alternatives,' you may be wondering if the sell-off presents opportunity. Although these stocks have fallen out of favor with big money pros, the overall fundamentals remain the same.
Nonetheless, nobody wants to buy stocks that are about to fall significantly. What should you do?
When the outlook is unclear, pros such as Jim Cramer often turn to technical analysis for insights. The following analysis was provided by Tim Collins, a Cramer colleague at RealMoney.com and speaker at TheStreetMonster Conference scheduled later this week.
Utilities - XLU
To get a better understanding of the utilities, Collins looked at patterns in the XLU, an ETF that tracks the sector. Looking at the daily chart, Collins thinks that the ETF has just completed a head and shoulders pattern, that's a very bearish pattern.
Lately, the XLU has been on a noteworthy path lower and Collins sees no reason for that to change.
To make the pattern all the more perilous, Collins said if the ETF stabilizes, the pattern looks even worse. That is, if the XLU consolidates in the $37 to $38 level, Collins believes it will form the right shoulder of a much bigger, much more bearish head and shoulders pattern.
Therefore, even though the XLU has already fallen about 10% from its highs, Collins suggests staying away.
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Real Estate REITs - IYR
Looking at a daily chart of the IYR, an ETF made up of real estate REITs Collins is also bearish. Although, he believes the group is oversold Collins points out that they can remain oversold for a long time.
And although he concedes there are some signs in this chart that the REITs could be finding a bottom in the $67 to $67.50 area —it doesn't necessarily mean the IYR is due for a bounce.
Looking at the weekly chart. Collins believes a so-called Fibonacci level failed to hold. Specifically, the recent drop is a 40% retracement from the start of the 2012 breakout. Because a lot of traders use Fibonacci ratios to guide their decisions, and a 38.2% retracement is one of those key levels, if the IYR closes below $68 at the end of the week, that will tell the Fibonacci followers that this level is not holding.
Collins find these levels precarious, and, at best, thinks you need to wait.
Consumer Staples - XLP
Looking at charts of the XLP, an ETF that tracks the consumer staples stocks Collins is again skeptical.
Collins sees a double top formation at $42; another bearish pattern. In addition, the so-called relative strength index and the stochastics have broken down harder than the actual price of the XLP, and that suggests to Collins that the staples aren't done going down.
In addition Collins says that if XLP closes below $40 investors will be run for the exits. According to the analysis, there's a lot of air under $40—no important support levels, just lots of room for the XLP to go into free fall.
Therefore, Collins would also avoid the XLP.
The Bottom Line
All told, Collins thinks that even though utilities, real estate REITs and consumer staples have come down significantly, they're still not safe to buy, none of them. Jim Cramer agrees. "I would much rather be a seller than a buyer," he said.
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