Mid-Cap Utilities Ready to Power Up

Small-cap, retail, and transportation stocks have rocketed higher in recent weeks, but it isn't wise to chase these overextended groups, because profit-taking could start at any time. So what overlooked sectors might catch fire next, as cash comes out of those winners and searches for a comfortable new home?

I nominate the mid-cap utility stocks. These issues are outperforming their large-cap brethren, with many trading above their 50-day moving averages, even though the Dow Jones Utility Average (UTIL) is stuck below that level after the five-week recovery. This superior performance could presage a notable rotation, with cash returning to the sector for the first time in 2010.

Dow Jones Utility Average -- Daily eSignal

The UTIL index broke down from a massive topping pattern in September 2008 and plunged to a four-year low. It bottomed at 288 in March 2009 and bounced up to a 52-week high at 408 last December. The index then rolled over with the broad market, violating the 50- and 200-day moving averages.

Price has now rallied back to the intersection of these resistance lines but is showing no signs that it's getting ready to break out and test last year's high. However, mid-cap buying activity offers a more bullish view, with the likelihood that this index and the entire group will head higher in the next few months.

EQT Corp. (EQT) -- Daily eSignal

EQT(EQT) is an integrated energy company serving Pennsylvania and the Appalachian region. It bottomed out in October 2008 and entered a steady uptrend that's still in force. The stock rallied to $46.80 in October of last year and pulled back in a bowl-shaped correction. It finally returned to the high last week and broke out.

Accumulation on this sector leader has been steady, but recent volume action doesn't support a quick burst to higher ground. Instead, look for the stock to enter a period of sideways consolidation between $45 and $47. In turn, that would improve the underlying technicals and set the stage for a rally into the low $50s.

Wisconsin Energy (WEC) -- Daily eSignal

Wisconsin Energy(WEC) posted major highs near $50 in 2007 and sold off with the broad market. It bottomed out in the mid-$30s and returned to those highs in December of last year. Resistance kicked in, right on schedule, dropping price into a six-week downturn. The stock bounced at $46.88 and has now pulled within a point of the breakout level.