Utilities Remain Most Overvalued Sector

NEW YORK (TheStreet) -- On July 30, I wrote an article titled "Consider Taking Profits on Utility Stocks." Two days later, the Dow Jones Utility Average set a multiyear high at 499.82.

On Friday, the Dow utilities closed at 472.13, down 5.5% from that high. Over the same period, the S&P 500 charted another 6.6% to the upside.

While this significant divergence was underway, the yield on the 10-year Treasury note rose from 1.470% to 1.870%.

That has caused the difference between the yield on that Treasury and the 3.66% dividend yield on the Utilities Select Sector SPDR (XLU) to narrow.

Looking at the overall stock market, stocks are now more overvalued than they were at the end of July.

On July 30, ValuEngine showed that 67.1% of all stocks were undervalued.

Today, that percentage is 45.7%. One important reason for this shift is the rising yield on the 30-year Treasury bond, which ended Friday at 3.091%, up from 2.550% at the end of July.

Today, 15 of 16 sectors are overvalued, led by utilities, which are now 18.5% overvalued vs. 12.9% on July 30. My investment theme for utilities thus remains the same today: "Consider taking profits on utility stocks."

The Dow Jones Utility Average is up just 1.6% year to date vs. 16.6% on the S&P 500.

The weekly chart below shows a negative profile with declining momentum and weekly closes below the five-week modified moving average at 476.08.

A key technical support not shown on this chart is the 200-day simple moving average at 464.48, which was tested last November.

The daily chart for XLU ($36.54) below shows that momentum is rising and XLU is just below its 21-day simple moving average at $36.65. It's also between its 200-day at $35.78 and its 50-day at $37.10.

For those employing a "buy and trade" strategy, my monthly value level is $35.96, with a quarterly pivot at $36.55 and a quarterly risky level at $39.89.

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