Welcome to November!

I’m sure quite a few of you are breathing a sigh of relief now that we are past the most volatile month of the year.

After the beating most of us took in the equity markets last month, we’re all looking forward to bigger and brighter things heading into the end of the year.

Historically, we are heading into the two best months of the year for stocks. Since 1950, the S&P 500 Index has averaged a gain of about 1.5% for November and 1.6% in December.

The holiday shopping season is nearly upon us, and many of you may be eying the retail sector to stock up on bargains after October’s nosedive.

I’m not going to dissuade you from your bargain-hunting spree. We all need a bit of a pick-me-up after October’s plunge … and bags of Halloween candy just won’t cut it this year.

What I am going to do is suggest a more stable alternative.

Despite the recent bounce in the major market indexes, I don’t think we’re quite out of the woods just yet.

After all, the midterm elections are next week.

While Wall Street will largely be OK with the outcome, the uncertainty heading into this major event has kept quite a bit of cash on the sidelines.

That means more market volatility.

The best way to ride this out is to shift your portfolio into a more defensive position — if you haven’t already.

Today, I’m going to look at one of your best options to position yourself defensively in this market and still make gains.

The Utilities Sector: It’s Electrifying

The key strategy when investing in times of uncertainty and market downturns is to seek out sectors that consumers can’t do without.

Staples like food, clothing, heat, water and electricity are a must. Demand for these products and services is inelastic.

This is where the utilities sector comes in.

As a whole, the group provides power for heating, cooling and electricity. It also delivers water. Aside from food and shelter, these are the staples of everyday life.

What’s more, consumer spending in these areas is often the last to take a hit, only seeing declines in the biggest of economic downturns. This is why the utilities sector is often the go-to defensive investment.

However, utilities stocks are also a good investment even in a bull market.

If you invested in the Utilities Select Sector SPDR ETF (NYSE: XLU) this year, you would have seen a similar performance to the S&P 500.

But the best part, as you can see from the chart below, comes in October.

Not only would you have missed the market downturn, you would have posted gains last month.

The best way to ride out volatile markets is to shift your portfolio into a more defensive position — if you haven’t already.

From its peak on October 3 through its low on October 29, the S&P 500 plunged nearly 13%. For the same period, XLU gained about 2.1%.

What’s more, year-to-date, the S&P 500 has gained about 1.4%. By comparison, XLU is up more than 4.5%.

But you haven’t missed out entirely on this defensive opportunity. Currently, XLU has pulled back to support at its 50-day simple moving average.

The recent pullback is due to investors moving a bit of cash out of defensive positions and back into momentum plays at the end of October.

But we have hardly seen the last of market volatility, and XLU still has plenty of upside in the current market.

As such, the current dip in XLU is a buying opportunity, especially for those investors looking to add a bit of security to their portfolios.

The best way to ride out volatile markets is to shift your portfolio into a more defensive position — if you haven’t already.

As you can see, utilizing a defensive strategy doesn’t mean you have to sacrifice portfolio gains. As my colleague Ted Bauman has said quite frequently lately, it’s better to beat a bear market than to try to beat a bull market.

Sometimes, lower-volatility investing is the real key to beating the market. On that front, it’s hard to do better than the Utilities Select Sector SPDR ETF.

So, while you’re out bargain hunting for cheap retail stocks following October’s sell-off, be sure to add some shares of XLU to your portfolio in the process. You’ll thank me for it later.

Until next time, good trading!


Joseph Hargett

Assistant Managing Editor, Banyan Hill Publishing