Industrial Products Stocks May Catch QE Fatigue

NEW YORK ( TheStreet) -- Much of the stock market rally since early June has been in anticipation that the Federal Reserve would implement QE3, and the central bank did so on Sept. 12.

The Dow Jones Industrial Average tacked on additional gains for only two more days after that and has since trended sideways to down as weaker-than-expected economic data and earnings warnings have pricked the hype of QE euphoria.

I began to worry about what I describe as "QE fatigue" on Sept. 21 when I wrote " QE Fatigue Plagues Transports, May Be Contagious," and at the end of the third quarter, the Dow Transportation Average was down 2.5% for the year, while the Dow Jones Industrial Average was up 10.0%.

On Sept. 28 I wrote " QE Fatigue Spreads from Transports to Semiconductors" and illustrated how the Philadelphia Semiconductor Index (SOX) broke below its 50-day and 200-day simple moving averages and ended September with a negative weekly chart profile. The SOX ended the third quarter up just 4.9% for the year, while the Nasdaq was up 19.6%.

Today I will show that QE fatigue could now be spreading into the industrial products sector.

Last week Caterpillar ( CAT) cut earnings expectations through 2015.

Last Thursday the final reading for second-quarter GDP came in at 1.3%, below the advanced and preliminary readings at 1.7%. Durables goods orders were down 13.2% in August, and the Chicago ISM is now just below 50. These data are symptoms that the industrial product sector is catching QE fatigue.

At www.ValuEngine.com we show the industrial products sector 4.0% overvalued, and that there are 10 sectors that are even more overvalued.

If you focus on the technicals, however, the Industrial Select Sector SPDR Fund ( XLI) will have a negative weekly chart profile given a close last week below the five-week modified moving average at $36.67.

Given this close, momentum will be declining from overbought territory with risk to the 200-week simple moving average at $30.74, which came into play a year ago. This is a technical warning of QE fatigue.

The daily chart for XLI ($36.53) shows a trading range for 2012 with highs at $38.17 on March 15 and at $38.07 on Sept. 14, and a low at $33.08 on June 4.

The daily chart is technically negative with declining momentum and closes below the 21-day simple moving average at $36.87.

A close below the 50-day moving average at $36.48 indicates risk to the 200-day moving average at $36.00.

My semiannual value level lags at $27.72 with a monthly pivot at $36.50, and annual and quarterly risky levels at $37.74 and $39.58, respectively.

Reading the Table

OV/UN Valued: The stocks with a red number are undervalued by this percentage, according to ValuEngine. Those with a black number are overvalued by that percentage.

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: the price at which to enter a good-'til-canceled 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.

Boeing ( BA) ($69.60 vs. $74.21 on Aug. 13) has a buy rating, according to ValuEngine, with a reasonable price-to-earnings ratio.

Boeing is below its 200-day SMA at $73.26. Boeing is well below its May 1 high at $77.83 with the June 5 low at $66.82.

The weekly chart is negative with the 200-week simple moving average a major support at $62.48. Investors should reduce holdings on strength to my weekly pivot at $70.29 and then employ a "buy and trade" strategy between the value level and risky level.

Caterpillar ($86.04 vs. $88.94 on Aug. 13) has a buy rating, according to ValuEngine, a favorable P/E ratio and is below its 200-day SMA at $96.20.

Caterpillar is well below its Feb. 24 high at $116.95 with the July 12 low at $79.55. The weekly chart profile is neutral with the 200-week SMA at $74.11. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Deere ( DE) ($82.47) has a hold rating, according to ValuEngine, with a favorable P/E. Deere is above its 200-day simple moving average at $79.65. Deere traded as high as $89.70 on Feb. 14 and as low as $69.41 on June 4. The weekly chart profile is positive with the 200-week SMA at $65.91. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Gardner Denver ( GDI) ($60.41) has a hold rating, according to ValuEngine, with a favorable P/E. GDI is below its 200-day SMA at $63.66. GDI is well below its Jan. 17 high at $84.46 with its June 4 low at $69.41. The weekly chart is overbought with the 200-week SMA at $53.84. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

General Electric ( GE) ($22.71 vs. $21.10 on Aug. 13) has a buy rating, according to ValuEngine, with a so-so P/E ratio. It's above its 200-day SMA at $19.69. GE traded to a multiyear high at $22.96 on Friday, and has an overbought weekly chart profile with the 200-week SMA at $16.77. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Illinois Tool Works ( ITW) ($59.47) has a buy rating, according to ValuEngine, with a so-so P/E ratio. It is above its 200-day SMA at $54.98. ITW set a multiyear high at $62.09 on Sept. 14 and has an overbought weekly chart with the 200-week SMA at $47.22. Investors should book profits on strength to my quarterly pivot at $59.84 then employ a "buy and trade" strategy between the value level and risky level.

3M ( MMM) ($92.42 vs. $92.29 on Aug. 13) has a buy rating, according to ValuEngine, a so-so P/E ratio and is above its 200-day SMA at $87.88.

MMM set a year-to-date high at $94.30 and has an overbought weekly chart with the 200-week SMA at $79.64. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Owens Illinois ( OI) ($18.76) has a buy rating, according to ValuEngine, with an excellent P/E ratio, and the stock is below its 200-day SMA at $20.94.

Owens set a 2012 high at $25.46 on Jan. 26 and a Sept. 5 low at $16.82. It has a neutral weekly chart profile, and its 200-week SMA is at $26.04. Investors and traders should reduce holdings on strength to my weekly pivot at $19.46, then employ a "buy and trade" strategy between the value level and risky level.

Parker Hannifin ( PH) ($83.58) has a hold rating, according to ValuEngine, with a favorable P/E ratio and is above its 200-day SMA at $82.44. PH traded to a 2012 high at $91.47 on Feb. 29 and as low as $70.42 on July 12. It has a positive weekly chart with the 200-week SMA at $67.90. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

United Technologies ( UTX) ($78.29 vs. $77.89 on Aug. 13) has a hold rating, according to ValuEngine, with a so-so P/E ratio. It is just above its 200-day SMA at $78.15. UTX has a 2012 high at $87.50 on March 15 and a June 5 low at $70.71. The weekly chart is neutral with the 200-week SMA at $70.37. Investors and traders should reduce holdings on strength to my semiannual pivot at $78.58 and then employ a "buy and trade" strategy between the value level and risky level.

In our table of industrial products stocks, six of 10 have buy ratings, while the other four have hold ratings. Eight of 10 are undervalued, with Owens-Illinois undervalued by 31.2% and United Technologies overvalued by 7.2%. Nine of 10 stocks had more than double-digit gains over the past 12 months, led by General Electric with a gain of 52.1%. Gardner Denver is the only 12-month loser, down 7.7%. All 10 stocks are expected to rally over the next 12 months. They range from Deere, which is expected to rally just 3.0%, to Boeing, which is expected to gain 10.5%.

Seven of the 10 stocks (BA, CAT, DE, GDI, OI, PH & UTX) had their year-to-date highs in the first half of the year, while the Dow industrials set a multiyear high on Sept. 14. This lagging is a symptom that these stocks have already been suffering the early stages of QE fatigue.

The other three stocks (GE, ITW & UTX) had year-to-date highs in August or September, with GE at a multiyear high on Friday.

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

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's 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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