Consider Taking Profits on Utility Stocks

NEW YORK ( TheStreet) -- Investors seeking dividend yields have been riding the bull market for stocks in the Dow Jones Utility Average.

One way to invest in these utilities is through the Utilities Select Sector SPDR ( XLU), an exchange-traded fund that tracks 31 utility stocks.

XLU has a dividend yield of 3.6%, a significantly higher return than the current 1.55% yield on the 10-year Treasury.

The question for investors today is whether to chase the upward market momentum in the Utilities SPDR when several components in the exchange-traded fund reached all-time highs on Friday.

I favor booking profits on market strength in anticipation of further quantitative easing by the Federal Reserve.

Now let's look at the weekly chart of XLU below.

Momentum is extremely overbought with a (12x3x3 weekly slow stochastic) reading of 88.23 on a scale of zero to 100.00, where a reading of more than 80.00 is overbought.

XLU ended the week well above its five-week modified moving average at $37.03. As long as weekly closes are above the rising five-week modified moving average, the weekly chart profile will remain positive but overbought.

My "buy and trade" investment strategy recommendation for XLU is to use good-'til-cancelled limit orders to sell strength to my weekly and quarterly risky levels at $38.74 and $39.89, respectively.

What I am concerned about is a potential technical sell signal where XLU has a weekly close below its five-week modified moving average with the momentum declining below 80.00. The downside risk on this sell signal is to the 200-week simple moving average at $31.19.

Source: Thomson Reuters

The pop-up table below shows data from www.ValuEngine.com covering the 31 components listed according to index weighting.

I did not include the data for Duke Energy ( DUK) as the metrics have not been updated since the company's merger with Progress Energy, which closed on July 2.

Reading the Table

OV / UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage, according to ValuEngine.

VE Rating: A 1-Engine rating is a strong sell; a 2-Engine rating is a sell; a 3-Engine rating is a hold, a 4-Engine rating is a buy; and a 5-Engine rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast One-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

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