Book Profits on Medical Stocks

NEW YORK (TheStreet) -- The medical sector has become one of the six pure momentum sectors in the market today. At www.ValuEngine.com we show the medical sector 15.7% overvalued vs. 5.5% overvalued when I wrote Book Profits on Health Care Stocks on Aug. 8. My ETF benchmark for this is the Health Care Select Sector SPDR Fund (XLV). Below, I profile this ETF and give updates on the top 10 holdings of this ETF.

Medical stocks are more volatile than most of the other momentum sectors as each stock has a story with regard to their drugs, medical services, devices or presence in biotechnology.

When you rely on my three-pronged approach of fundamental screening, technical screening with chart patterns and applying value levels at which to buy and risky levels at which to sell, you are using guidelines to judge what stock specific news is factored-in, or not factored in, during the day to day volatility in the stock market.

Chart Courtesy of Thomson/Reuters

The weekly chart above shows that XLV remains in a positive but overbought pattern with XLV above its five-week modified moving average at $39.08 with an overbought momentum (12x3x3 weekly slow stochastic) reading. Note that when the rally ends the risk is to the 200-week simple moving average at $31.52.

The daily chart below shows an overbought momentum (12x3x3 daily slow stochastic) reading. XLV ($40.07) is above its 21-day, 50-day and 200-day simple moving averages at $39.17, $38.69 and $36.87. XLV set an all-time high at $40.21 on Wednesday. My annual value levels are $36.71 and $34.12 with monthly and quarterly risky levels at $40.27 and $40.84.

Chart Courtesy of Thomson/Reuters

The above table shows data from www.ValuEngine.com covering 10 components of the Health Care Select Sector SPDR.

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 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. 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 timeframe noted.

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

Abbott Labs ( ABT) ($69.35 vs. $68.29 on Aug. 8) set an all time high at $69.60 on Sept. 19. ABT has been rated a buy according to ValuEngine, has a reasonable P/E ratio and is well above its 200-day SMA at $60.78. Reduce your long position then look to buy weakness to my quarterly value level at $64.20.

Amgen ( AMGN) ($81.71 vs. $81.57 on Aug. 8) set a multiyear high at $85.27 on Aug. 27. AMGN remains buy rated, has a reasonable P/E ratio and is well above its 200-day SMA at $71.30. Employ a "buy and trade" strategy between the value level and risky level.

Bristol Myers ( BMY) ($32.90 vs. $32.54 on Aug. 8) set a multiyear high at $36.34 on July 2. BMY remains buy rated, has a reasonable P/E ratio and is below its 200-day SMA at $33.50. Employ a "buy and trade" strategy between the value level and risky level.

Express Scripts ( ESRX) ($62.98 vs. $56.02 on Aug. 8) set an all-time high at 64.33 on Sept. 6. ESRX remains buy rated, has so-so P/E ratio and is well above its 200-day SMA at $54.14. Employ a "buy and trade" strategy between the value level and risky level.

Gilead Sciences ( GILD) ($67.21 vs. 57.552 on Aug. 8) set an all-time high at $67.55 on Sept. 18. GILD has been downgraded to hold from buy Thursday morning, has an elevated P/E ratio and is well above its 200-day SMA at $49.92. Reduce your long position then look to buy weakness to my quarterly value level at $51.69.

Johnson & Johnson ( JNJ) ($68.60 vs $68.29 on Aug. 8) set a multiyear high at $69.75 on Aug. 1. JNJ remains buy rated, has a reasonable P/E ratio and is well above its 200-day SMA at $65.69. Sell strength to my quarterly pivot at $69.81 then employ a "buy and trade" strategy between the value level and risky level.

Eli Lilly ( LLY) ($46.86 vs. $42.75 on August 8) set a multiyear high at $47.26 on Sept. 13. LLY remains buy rate, has a reasonable P/E ratio and is well above its 200-day SMA at $41.37. Reduce your long position then look to buy weakness to my quarterly value level at $44.03.

Merck ( MRK) ($44.51 vs. $44.00 on Aug. 8) set a multiyear high at $45.17 on July 27. MRK remains buy rated, has a favorable P/E ratio and is well above its 200-day SMA at $39.66. Reduce your long position then look to buy weakness to my quarterly value level at $39.13.

Pfizer ( PFE) ($24.16 vs. $23.74 on August 8) set a multiyear high at $24.48 on July 31. PFE remains buy rated, has a favorable P/E ratio and is well above its 200-day SMA at $22.38. Employ a "buy and trade" strategy between the value level and risky level.

United Health Group ( UNH) ($54.95 vs. $52.54 on August 8) - set a multi-year high at $60.75 on June 19. UNH remains Strong Buy rated, has a favorable P/E ratio and is just above its 200-day SMA at $54.56. Employ a "buy and trade" strategy between the value level and risky level.

Nine of the stocks profiled today are overvalued fundamentally with UNH undervalued by 12.2%. Seven of ten have overbought weekly chart profiles. BMY and JNJ have declining momentum. UNH has rising momentum as the stock becomes a Dow Component. All ten have traded higher by 11.0% (JNJ) to 67.8% (GILD) over the past twelve months, have P/E ratios between 10.7 (PFE) and 19.8 (GILD). In my judgment when these stocks turn lower the stocks above their 200-day simple moving averages have risk to this key support.

At the time of publication the author held no positions in any of the stocks 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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