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.

The above table shows data from www.ValuEngine.com covering nine components of the Dow Utility Average.

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by that 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.

Value Level is the price at which to enter a good-'til-cancelled limit order to buy on weakness. The letters mean: 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.

American Elect Power ( AEP) ($43.66 vs $42.42 on July 30) continues to have a Buy rating and a so-so price-to-earnings ratio. It is trading significantly higher than its 200-day SMA at $40.04. If you are long this stock, consider taking some money off the table on strength to my quarterly pivot at $43.86, then employ a "buy and trade" strategy between the value level and risky level.

Dominion Resources ( D) ($52.82 vs $54.97 on July 30) still has a Buy rating and an elevated P/E ratio, and is just above its 200-day SMA at $52.03. Employ a "buy and trade" strategy between the value level and risky level.

Duke Energy ( DUK) ($64.19 vs $67.46 on July 30) has a Buy rating and a so-so P/E ratio. It just moved below its 200-day SMA at $64.92. Employ a "buy and trade" strategy between the value level and risky level.

Consolidated Edison ( ED) ($59.81 vs $64.90 on July 30) continues to have a Buy rating, a so-so P/E ratio, and just moved below its 200-day SMA at $60.19 last Friday. If you reduced a long at the higher levels, consider adding to the position on weakness to my monthly pivot at $58.69, then continue a "buy and trade" strategy between the value level and risky level.

Exelon Corp ( EXC) ($35.94 vs $39.37 on July 30) continues to have a Hold rating, a reasonable P/E ratio and is well below its 200-day SMA at $38.91. Employ a "buy and trade" strategy between the value level and risky level.

First Energy Corp ( FE) ($43.28 vs $50.45 on July 30) still has a Buy rating, a reasonable P/E ratio and is well below its 200-day SMA at $45.61. Employ a "buy and trade" strategy between the value level and risky level.

PG&E Corp ( PCG) ($43.25 vs $46.11 on July 30) still has a Buy rating, a reasonable P/E ratio and held its 200-day SMA at $43.03 last week. Employ a "buy and trade" strategy between the value level and risky level.

PPL Corp ( PPL) ($29.07 vs $29.17 on July 30) still has a Buy rating, a reasonable P/E ratio and has been above its 200-day SMA at $28.27. If you are long this stock, consider taking some money off the table on strength to my quarterly pivot at $30.28, then employ a "buy and trade" strategy between the value level and risky level.

Southern Co. ( SO) ($45.05 vs $48.42 on July 30) has been upgraded to a Buy rating, an elevated P/E ratio, and just moved below its 200-day SMA at $45.63 last Friday. If you reduced a long at the higher levels, consider adding to the position on weakness to my annual pivot at $44.66, then continue a "buy and trade" strategy between the value level and risky level.

In sum, booking profits at the end July was a prudent investment strategy for eight of the nine stocks profiled today.

At the time of publication, Suttmeier held no positions in securities mentioned.

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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