If things get worse, where should investors hide their money until the storm blows over?
That’s the question nervous traders are beginning to ask themselves as gravity takes hold of the indexes.
And according to two strategists, the best offense this year might just be defense, or more specifically—utilities. The S&P 500's utilities sector index and the Dow Jones utility average (DJU) are both up 10 percent so far in 2014.
"As the UConn Huskies showed, the best offense is oftentimes a good defense," said Richard Ross, global technical strategist at Auerbach Grayson. "That's exactly what we've gotten with the utilities."
Utilities have a couple things going for them. They sport meaty dividends and make money in both good times and bad. But according to Ross, what’s good for utilities may not necessarily be good for the broader market.
"If the utilities were to break out at this point, I think it would suggest an ultradefensive strategy here, meaning investors are really selling just about everything else and they're seeking that safety. They're hiding in those utilities. So, if you own utilities, you'd love to see them break out. But, the other portion of your portfolio would probably be headed in the wrong direction, which is not what we want to see."
CNBC contributor Gina Sanchez, founder of Chantico Global, said that utilities have had a great run this year not only because of the weather in much of the United States but also because they took a hit when the Federal Reserve began talking about tapering its stimulus last year. Since they tend to pay higher dividends, utilities are viewed somewhat like fixed income securities and are sensitive to interest rates. Thus, in the month after the first discussion of a taper in May 2013, the DJU dropped nearly 9 percent.
"They're coming from a cheaper place," said Sanchez. "Because they are still actually reasonably cheap, it does make them a really, really good—even doubly—defensive area to be in.
Though she sees warmer weather ahead as vulnerability for utilities stocks, she sees it as the best place should the market take a big tumble.
"If you expect further weakness," said Sanchez, "utilities are going to be a place to hide."
To see the full discussion on utilities, with Ross on the technicals and Sanchez on the fundamentals, watch the video above.
- Utility Industry