Trading Industrial and Transportation Stocks

NEW YORK (TheStreet) -- Since July 30, I have been analyzing sectors and focusing on rotation strategies -- booking profits in overvalued sectors, buying stocks in undervalued sectors, and trading the neutral sectors. Today, I look at "buy and trade" strategies for industrials and transports.

My benchmark ETF, the Industrial Select Sector SPDR Fund ( XLI) includes both industrial and transportation stocks. The top 16 components of this 60-stock index include five stocks in the Dow Jones Industrial Average and five in the Dow Jones Transportation Average. Since the Industrial ETF includes some transportation stocks, I will also consider the iShares Dow Jones Transportation Avg ( IYT).

Source: Thomson Reuters

The daily chart of the XLI ($36.68), shown above, has an overbought-momentum (12x3x3 daily slow stochastic) reading, with XLI above its 21-day, 50-day and 200-day simple moving averages at $35.58, $35.07 and $35.39, respectively. XLI closed Friday up 10.9% from its June 4 low at $33.08. My semiannual value level lags at $27.72 with a weekly pivot at $36.42 and annual, monthly and quarterly risky levels at $37.74, $38.02 and $42.08, respectively.

Source: Thomson Reuters

The daily chart of the IYT ($90.34), shown above, has a rising-momentum (12x3x3 daily slow stochastic) reading, with IYT below its 21-day, 50-day and 200-day simple moving averages at $90.62, $90.94 and $91.14, respectively. IYT lagged the XLI with a close on Friday up 4.9% from its June 4 low at $86.09. My semiannual value levels lag at $80.77 and $74.80 with weekly, monthly and annual risky levels at $91.74, $95.99 and $97.22, respectively.

The above table shows data from ValueEngine.com covering the top 16 of the 60 components of the XLI, 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.

Analysis of the Top 16 Components of Industrial SPDR

Looking at the overvalued and undervalued data, 14 of the 16 stocks are undervalued, with FedEx ( FDX) and Caterpillar ( CAT) the cheapest at 20.2% and 20.1% undervalued, respectively.

United Parcel Service ( UPS) and Union Pacific ( UNP) both have "5-Engine" strong buy ratings according to ValuEngine. Ten stocks have "4-Engine" buy ratings and four have "3-Engine" hold ratings.

All 16 stocks traded higher over the past 12 months, led by General Electric ( GE) with a gain of 45%.

All 16 stocks are projected to be higher 12 months from now by 2.6% to 13.1%, with reasonable P/E ratios between 9.6 and 17.3 times forward 12-month EPS estimates.

Here are my "buy and trade" price levels for the five Dow Industrial and five Dow Transport components of the XLI:

General Electric ($21.10) -- My annual value level is $20.41 with a weekly pivot at $20.97 and quarterly risky level at $22.99.

United Technologies ( UTX) ($77.89) -- My weekly value level is $74.51 with monthly and semiannual pivots at $78.60 and $78.58 and an annual risky level at $86.76.

3M ( MMM) ($92.29) -- My annual value level is $73.14 with semiannual and weekly pivots at $90.72 and $92.78 and monthly and quarterly risky levels at $94.76 and $95.07.

Caterpillar ($88.94) -- My weekly value level is $83.42 with a monthly risky level at $94.16.

Boeing ( BA) ($74.21) -- My semiannual value level is $59.43 with a weekly pivot at $75.59 and quarterly risky level at $78.69.

United Parcel Service ($76.30) -- My semiannual value level is $70.89 with a weekly pivot at $78.65 and monthly risky level at $81.50.

Union Pacific ($122.01) -- My quarterly value level is $118.06 with a monthly pivot at $124.67 and weekly risky level at $128.63.

FedEx ($87.80) -- My semiannual value level is $82.97 with a weekly risky level at $92.85.

CSX Corp. ( CSX) ($22.98) -- My semiannual value level is $17.35 with monthly, weekly and semiannual pivots at $22.19, $22.89 and $22.60, respectively, and a quarterly risky level at $27.63.

Norfolk Southern ( NSC) ($74.56) -- My semiannual value level is $68.50 with an annual risky level at $77.92.

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.

Previous Sectors Profiled

Here's a list of the sectors I have profiled since July 30:

On July 30, the investment strategy was to book profits in utility stocks. Investors who bought utility stocks for the dividend, based on the so-called concept of "being paid to wait" for growth opportunities, have significant gains just in capturing a portion of the 73% gain in the Dow Jones Utility Average from its March 2009 low to the high set two weeks ago. The utilities sector remains overvalued by 14%.

On July 31, the strategy was to buy stocks in the basic-materials sector, which is still undervalued by 11.6%.

On Aug. 1, the play was to buy stocks in the energy sector, still undervalued by 4.7%.

On Aug. 6, it was to book profits in the consumer-staples sector, still overvalued by 7.9%.

On Aug. 8, the idea was to book profits in the medical sector, still overvalued by 5.1%.

On Aug. 9, I presented "buy and trade" strategies for tech and telecom stocks, with the computer and technology sector overvalued by 4.4%.

As of publication, the author had no positions in the stocks mentioned today, and 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.

More from Opinion

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Red Hat CFO Tells TheStreet: Tech Trends Are Still in Our Favor

Throwback Thursday: Intel Edition

Throwback Thursday: Intel Edition

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

Intel's Next CEO Should Try Harder to Protect Its Flanks Against AMD and Others

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

Wednesday Wrap-Up: GE and Facebook

Wednesday Wrap-Up: GE and Facebook