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Book Profits in Overvalued Consumer Staples

NEW YORK ( TheStreet) -- The consumer staples sector covers what consumers eat, drink, smoke, clean with and use to primp their bodies. It includes supermarkets, drugs and some Big Box retailers. These companies' stocks have been popular choices for investors seeking safety, since consumers still must buy and use products considered necessities.

Last Tuesday, the Conference Board's reading on the Consumer Confidence Index came in better than expected at 65.9 in July, but this reading remains well below the neutral zone of 90 to 120 for this measure.

On the same day, the personal spending report for June showed no growth for the second month in a row. This is not data that can sustain the stock strength seen in the consumer staples sector.

A great benchmark for the consumer staples sector is the Consumer Staples Sector SPDR Fund (XLP), which contains 41 stocks including four in alcoholic beverages, five in soft drinks, 13 in food, two drugstores, four supermarkets, three soap producers, four tobacco companies and two cosmetics companies. These companies all make products consumers use regardless of the economic times.

Source: Thomson Reuters

The consumer staples sector is 11.3% overvalued, according to ValuEngine. The Consumer Staples SPDR traded to an all time high at $35.82 on July 31 and as low as $19.28 in March 2009. The upside to last week's high was a gain of 85.8%.

The weekly chart shows that XLP is positive but extremely overbought with a 12x3x3 weekly slow stochastic reading of 91.84 on a scale of zero to 100, where a reading above 80 is overbought. XLP is above its five-week modified moving average at $34.98. My annual value level is $32.87 with a monthly pivot at $36.06 and quarterly risky level at $37.64. "Buy-and-trade" investors should sell strength to $36.06 and $37.87.

With XLP overvalued fundamentally and overbought technically, it should be difficult to maintain a continued series of all time highs for the stocks in this sector.
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