My Top High-Yield Pick In A Sector Ready To Rally
With the Federal Reserve seemingly conflicted about when to raise short-term interest rates, it is no wonder the market has been chopping sideways for weeks, unsure of which direction to break out. Some interest-rate sensitive sectors have fared worse, but this now sets up a buying opportunity.
Looking at the Treasury bond market, long-term interest rates have not budged since July. Currently, the benchmark 10-year rate appears ready to break down, which will send note and bond prices higher, as well as boost prices of interest-rate sensitive stocks.
Aside from all these intermarket machinations, the chart of the Dow Jones Utility Average looks ready to break out to the upside.
Traders can buy a utilities ETF to participate in the potential upside, but digging a little deeper into component stocks reveals some even better bets.
Top on my list is Southern Company (NYSE: SO ) , which operates power-generating and transmission facilities throughout the southeastern states. The stock offers a 4.2% dividend yield and a bullish setup on the charts.
SO fell from its 52-week high of $54.64, made on July 22, to an intraday low of $50 on Aug. 17 -- a more than 8% drop in less than four weeks. On the day of the low, the company made a share offering worth roughly $1.6 billion. However, the stock managed to reverse course and close with a net gain. Volume was huge, suggesting a selling climax that would set shares up for a rally.
It took two weeks before the bulls were able to capitalize on this event, but after the August jobs report was released on Friday, the stock closed above its resisting trendline from the July peak.
What was most intriguing about the action over the past two months was that on-balance, or cumulative, volume continued to rise even as prices fell. This suggests that bulls were buying the dips while bears were not quite as sure of themselves. Such continued demand for shares leaves the stock open to a rally.
So, Southern Company is in a sector that is poised to rally, money is flowing into the stock already, and long-term interest rates appear ready to move lower, not higher. That is enough for me, but the next chart shows there is even more to love about this stock.
The Moving Average Convergence/Divergence (MACD) momentum indicator now sports an upside crossover using standard parameters. On its own, it wouldn't be a strong signal, but when combined with a "W," or double-bottom, formation inside Bollinger Bands, it suggests the tide has turned for the better.
Unless SO falls back below the July trendline, I expect a rally to or through its previous high. If it does start to move higher, it will also cross back above its 50-day moving average to add another technical positive to the ledger.
While this trade is not likely to produce a double-digit capital gain over the next few weeks, shares throw off a juicy 4.2% yield. The next ex-dividend date is expected in mid-November. However, if the target is reached faster than expected, we may not see a dividend payment.
Traders also have the option of collecting what is essentially an immediate dividend as soon as they purchase shares. This extra payment is in addition to the regular dividend but is often much bigger. Find out how to collect it here.
Recommended Trade Setup:
-- Buy SO at the market price
-- Set stop-loss at $51
-- Set initial price target at $55 for a potential 10% gain in nine weeks, including dividends
This article originally appeared on ProfitableTrading.com: My Top High-Yield Pick In A Sector Ready To Rally
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