Power Stocks Lose Their Juice

Investors should not ignore the technical damage done recently to the energy and public utilities sectors. The Energy Select SPDRs(XLE) has declined 17.8% since Sept. 22. The Dow Utility Average declined 13.6% from its all-time high of 438.74 set on Oct. 4 to a low of 378.95 last week. My model has been waving red flags as the energy sector ended the third quarter 17.2% overvalued with utilities 11.5% overvalued.

The chart profiles for the XLE and the Utility Average are similar, and they reflect the technical damage that has been done. A look at the daily and weekly charts for the Dow Utility Average will show clearly that power is no longer a safe haven for investors.

A look at the action in commodities shows that further upside appears limited. With these commodities markets peaking, it is not surprising to see energy stocks and utility companies face significant price reversals, especially given how overvalued they were at the end of the third quarter.

Comex gold peaked at $483.10 on Oct. 12, between my quarterly risky level at $482.7 and my semiannual risky level at $486.5. Gold is overbought, and a weekly close below the five-week modified moving average at $463.5 would shift gold to negative.

Nymex crude oil peaked at $70.85 on Aug. 30, just as Hurricane Katrina made landfall. The weekly chart profile for crude oil has been negative since Sept. 16, and it would stay negative on a weekly close below the five-week modified moving average at $62.94.

The CRB peaked at 337.17 on Sept. 2, and it ended last week with a negative weekly chart profile. The CRB stays negative on a close this week below the five-week modified moving average at 323.35.

No Safe Havens

Recent equity volatility is also a warning. When the equity averages swing as much as they have day to day, with negative weekly chart profiles and with the monthly chart profiles on the cusp of shifting to negative, that's a clear warning that there are no safe havens.

A major reversal in the Dow Utility Average has been confirmed. Friday's close was below the prior week's close of 394.06, which confirms the weekly key reversal set two weeks ago following the all-time high at 438.74, set Oct. 4. This close in October below September's low of 405.56 marks a monthly key reversal.

I am watching the Dow Utility Average's 200-day simple moving average at 376.58 to see if utilities can stabilize above this key trend. A trend below the 200-day SMA would be a significant long-term negative. The Dow Utility Average has been above its 200-day SMA since mid-April 2003, and as the daily chart below shows, the index last tested this major support on May 12, 2004. The 200-day SMA is represented by the blue line, and the 50-day SMA is the red line.

Looking for Stability The trend around the 200-day simple moving average is key here

Source: Athena Graphs on Telerate Plus

This chart clearly shows how important it is for the Dow Utility Average to hold its 200-day SMA. It also shows that the 50-day SMA is now resistance.

This weekly chart of the Dow Utility Average below shows the uptrend going back to Sept. 11, 2001, and it shows risk to the 360 level by year-end as long as the weekly chart profile remains negative. The weekly chart profile will stay negative on a weekly close below the five-week modified moving average at 405.35 this week.

The Negative Trend's Risk A longstanding uptrend in the Dow Utility Average could be in jeopardy

Source: Athena Graphs on Telerate Plus

The Energy Select SPDR has patterns similar to the Dow Utility Average's. The XLE moved above and stayed above its 200-day SMA in April 2003, tested it as support in August 2003 and has been solidly above it since then. Now the 200-day SMA on the XLE is important support at $44.44. If there is a trend in the XLE below its 200-day SMA, there is risk to my semiannual value level at $32.66. My quarterly pivot on the XLE at $48.10 appears as a barrier on strength.