Rate changes key for utility play Fortis

The Stock: Fortis Inc.

Recent price: $27.82 (U.S.)

Trend: A sign of increasing investor anxiety is the growing demand for income stocks in recent weeks.

Along with preferred shares, many North American utilities stocks have been driven to new 52-week highs and are among the leading performers in the fourth quarter.

The S&P utilities index and the Dow Jones utilities index are outperforming the broad market by 4 per cent over the past three months. Canadian utilities stocks are also doing well.

The sector was the cream of the crop last week, rising 3 per cent while telecom stocks stumbled amid competitive pressures and commodity stocks slipped into the red.

Relative performance gains of the utilities sector generally reflects asset allocation toward defensive positions, as well as changes in the yields on alternative investment securities.

Stock Trends analysis is primarily focused on stock price movements, and does not evaluate for the particular strength of an income investment.

Seasoned conservative investors know well the power of the dividend, and develop multiple trading strategies to maximize income flows from income securities - regardless of the stock's trend. However, the technical merit of the market leadership of the utilities sector should direct even momentum investors toward new or increased exposure to these oft-considered sleepy stocks.

The Trade: A diversified utilities company, Fortis Inc. has been trending positively since October and has outperformed the S&P/TSX composite index in eight of the past 12 weeks. Stock Trends Bullish since early July, Fortis's stock has advanced 7 per cent in the past two weeks and hit a new 52-week high last Friday. Shares are now trading above the level they did at the pit of the financial crisis in the fourth quarter of 2008. Along with Canadian Utilities Ltd., Fortis proved to be a strong magnet for investors scrambling for safety in the high-anxiety conditions of a year ago, managing to outperform the flagging TSX by over 50 per cent during the three months leading up to the market low in late November, 2008.

The stock's current rally, though, is amid a TSX market bull trend that may be showing some signs of hitting a plateau. Fortis shares' comparative relative strength against the broader market is consistent with the sector's - outpacing the stalling market by 10 per cent in the quarter. Investors should be prepared to take defensive positions as the S&P/TSX composite index threatens to drop below its 13-week moving average trend line.

The Upside: Utilities stocks need a Goldilocks kind of economic environment to prosper - not too hot, not too cold - where an accommodative monetary policy and a flattening interest rate yield curve improves the attractiveness of the sector. Previous Fortis bull trends peaked at $30. Should the stock break through resistance at $28, shareholders may have a limited 5- to 7-per-cent upside to balance against overall market performance. Like other recent columns on stocks that offer a defensive position for wary investors, this technical profile emphasizes relative price performance over the coming period.

The Downside: Risks for Fortis and all utility stocks are multipronged, but a retreating bond market and rising interest rates weigh heavily. A reversal in the rate outlook could set Fortis back to the $26 support level at the intermediate trend line.