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.

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