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Utilities and auto retail stocks: Long term rotation

September 25, 2012

25 September

Four weeks ago, I described a possible long term rotation: long utilities, short auto retail stocks. This rotation is setting up according to my moving average crossover criteria.

I realise that this is quite an obscure set of stocks but I want to show that I can find examples meeting my criteria, although they occur quite rarely.

These long term moving average crossover examples are not always as practically tradable as the RSI and Bollinger Band examples, in terms of clear entry criteria and stops. They can inform you of broader market developments though.

The criteria are:

  • A pair of moving averages that has not crossed over for four years
  • Divergence on the MACD indicator
  • Final confirmation given by the moving average crossover

Examples

The examples are shown with 30 and 40 week exponential moving averages.
The MACD indicator is based on these averages. It is percentage based, to not be skewed by the wide range of ratio values for the stock pair.

Autozone (AZO) v Entergy Corp (ETR)

Azoetr_macd

  • The MACD last crossed zero in August 2008
  • Divergence has built up since the first peak in 2009, however divergences can last a long time
  • The uptrend, whether taken from the 2008 or 2009 low is broken
  • The MACD has not crossed zero yet, that will be final confirmation of this rotation
  • If you are managing a US stock portfolio, I would not wait for that cross to adjust my stock weightings. I expect this crossover to occur

Autozone (AZO) v Nextera Energy (NEE)

Azonee_macd

  • Likewise, the MACD last crossed zero in August 2008 and divergence has built up, particularly since January 2011
  • The moving averages have crossed now, so this long term rotation is signaled

O’Reilly Automotive (ORLY) v Nextera Energy (NEE)

Orlynee_macd

  • The MACD crossed zero in October 2008, so this example is one month short of four years, never mind
  • Divergence occurred with each peak up to May 2012
  • The moving averages have now crossed over, so this long term rotation is signaled

Autozone (AZO) v Public Service Enterprise (PEG)

Azopeg_macd

  • The MACD crossed zero in August 2008
  • Divergence has occurred with each peak
  • The trendline from the 2007 low is broken
  • Confirmation of this rotation is required by a crossover of the MACD below zero

Autozone (AZO) v Edison International (EIX)

Azoeix_macd

  • The MACD crossed zero in July 2008. It briefly went below zero in January 2010. This was such a minor break that I’ll ignore it for the four year stipulation
  • MACD divergence has been in place since 2010 and now, the moving averages have crossed
  • The signal for this long term rotation is given

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