Trading Technology and Telecom Stocks

NEW YORK (TheStreet) -- I have been analyzing an array of sectors since July 30, when I wrote about taking profits in overvalued utility stocks. Today, I analyze the technology sector, not to recommend increasing or decreasing holdings in the sector, but to provide guidelines to use in "buy and trade" strategies.

The rotation into this sector was already underway before July 30, and five of the 10 stocks I profile today have become overbought, according to their daily charts.

The computer and technology sector is 4.5% overvalued, while the utility sector is 13.4% overvalued. I mention this because my benchmark for tech sector is the Technology Select Sector SPDR Fund ( XLK), which contains 79 equity components and several stocks that ValuEngine considers utility stocks.

In fact, two of XLK's top 10 equities by market weighting are considered utilities, AT&T ( T) and Verizon Communications ( VZ).

The rotation into the XLK off a June 4 low has six of the 10 stocks I am profiling trying to trade back up to their year-to-date highs set between March 27 and May 3, which matches the pattern of the XLK.

>>Also See: Stocks in SOX: Sector Rotation Shifts to Chips

The daily chart of the XLF is overbought, as the ETF attempts to trade up to its April 3 high, which was its highest point since April 2001.

From its August 19, 2011 low at $22.47 to the April 3 high at $30.62, the XLK rose 36.3%. It has gained 136.6% since its November 2008 low of $12.94. My annual value level is $25.48 with an annual pivot at $29.93 and monthly and quarterly risky levels at $31.10 and $32.18.

Source: Thomson Reuters

The above table shows data from ValuEngine.com covering the top 10 of the 79 components of the XLV, listed by weighting from top to bottom.

Reading the Table

OV/UN Valued -- The stocks with a red number are undervalued by the percentage shown. 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 1-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.

Value Level: The price at which to enter a GTC Limit Order to buy on weakness (W-Weekly, M-Monthly, Q-Quarterly, S-Semiannual and A- Annual).

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: The price at which to enter a GTC Limit Order to sell on strength.

Analysis of the Top 10 Components of Technology SPDR

Looking at the overvalued and undervalued data, six of the 10 stocks are undervalued with Cisco Systems ( CSCO) the cheapest at 26.2% undervalued.

The telecom stocks in the group, AT&T and Verizon, are the most overvalued, by 19.6% and 11.8%, respectively, with both coming off respective multi-year highs of $38.28 and $46.41 set on August 1. Since AT&T and Verizon are also utilities, investors should consider liquidating them on strength to the pivots and risky levels.

Another reason to rotate from AT&T and Verizon into one of the others in the table is that they are rated 3-Engine, or hold, while all others are rated 4-Engine, or buy, according to ValuEngine. Qualcomm ( QCOM), which can be considered either a tech or telecom stock, has been downgraded to hold from buy, according to ValuEngine this morning.

All 10 stocks traded higher over the past 12 months, led by Apple ( AAPL) with a gain of 75.5% over the past 12 months. This strength has increased Apple's weighting in the XLK to nearly 20%. Note that AT&T and Verizon have been the second and third best performers in the group, with 12-month gains of 43.0% and 40.4%, respectively.

All 10 are projected to be higher 12 months from now by 3.5% to 6.9%, with reasonable-to-high price-to-earnings ratios between 10.5 and 19.4 times forward 12-month EPS estimates. Intel ( INTC) and Cisco are members of my ValuTrader Model Portfolio.

I advocate the use of GTC Limit Orders to add to long positions or become less short on share price weakness to the Value Levels. Traders should enter GTC Limit Orders to reduce long positions or to add to a short position on strength to Risky Levels.

At the time of publication, the author did not own any of the stocks mentioned and had no other conflicts.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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