Investors should not ignore the technical damage done recently to the energy and public utilities sectors. The
Energy Select SPDRs
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
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
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.
Four Undervalued Stocks
Are there any cheap stocks in these sectors given this weakness? I set my screens on the energy and public utilities sectors to identify companies within these sectors that have cheapened enough to become at least 40% undervalued according to my model. Three energy stocks and one utility passed this test, but all four have negative weekly chart profiles.
I emphasize my valuations here because there are only four stocks in the energy and public utilities sector that trade above $5 per share and are at least 40% undervalued. Given the negative technicals in the sector, buying any of these stocks is not a sure thing, but it is a way that traders can try to capture a rebound. My model suggests that investors should look at their portfolios carefully and be prepared to reduce holdings on strength, as energy and public utilities are unlikely to power your portfolios going into the end of the third quarter as well as they have in the past.
At 49.0% undervalued,
( EP) is the most undervalued of the group, with fair value at $22.43. Its weekly chart profile is negative, with the stock trading below both its five-week modified moving average at $12.29 and its 200-week simple moving average at $12.68. I show risk to my quarterly value level at $11.05, where my model suggests buyers should emerge. Below that is the 52-week low at $8.59.
is slightly less extreme, at 42.6% undervalued, making its fair value $164.95. The weekly chart profile is negative with the five-week MMA at $101.56. I show risk to my quarterly value level at $84.08, where buyers should emerge.
National Fuel Gas
is 41.4% undervalued, making fair value $51.39. The weekly chart profile is negative with the five-week MMA at $31.33. I show risk to my quarterly value level at $28.45, where my model suggests buyers should emerge.
Least undervalued is
, which is 40.3% below its fair value of $60.76. Its weekly chart profile is also negative, with the five-week MMA at $41.26. There's risk to my semiannual value level at $32.52, where my model suggests buyers should emerge.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of
newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.