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Research Edge Position: Short XLU

We are short XLU currently; this is a trade that has set up nicely from a technical standpoint and ties in with our reflation theme.  With rising fuel costs and increased rate regulation the utility sector is looking at a potential squeeze on margins on the horizen, not to mention the anticipation that emission costs will increase as control measures (or caps) come into play.

Our model portfolio does not allow for options, and we are outright short.  For those of you that trade options and are looking to capture premium, the near month calls might be attractive.

Currently the implied volatility levels for XLU have remained high compared to the broad market on a historical basis; with at-the-money July calls showing levels in the 24 to 25 range, vs. a 30 day realized volatility of 24.5 and a VIX at 28. This volatility could in part reflect some of the bond market action we commented on this morning due to the sectors rate sensitivity.

For those brave souls who are looking to harvest premium here a short call look position looks relatively attractive as the macro and technical factors intersect with decent premiums  -particularly as broad market volatility  levels continue to trend down. Note also that this ETF goes ex-dividend in the coming week, another positive for the play.

Andrew Barber

Director