The Basic Industries Sector Has Not Maintained QE Hype

NEW YORK ( TheStreet) -- In dissecting the basic industries sector you find divergences among the different industries. Below, I profile two stocks in the nonferrous mining industry, two in diversified chemical, and one stock each for agriculture products, fertilizers, gold mining, steel producers and building materials.

All nine stocks are components of the Materials Select Sector SPDR Fund ( XLB), which ended September with a positive but overbought weekly chart profile while. XLB closed Wednesday above last week's low at $36.31, but a close this week below $36.58 shifts the weekly chart profile to negative.

Fundamentally www.ValuEngine.com shows the basic industries sector just 2.1% overvalued following benchmark revisions based upon new data for September. Nine of the remaining fifteen sectors are more overvalued.

Among the nine stocks I am covering today, five have buy ratings and four have hold ratings. Back on July 31 when I wrote Trading the Undervalued Basic Materials Sector the sector was 14.7% undervalued, and six of these nine stocks had buy ratings and three had hold ratings.

Chart Courtesy of Thomson/Reuters

The daily chart for XLB ($36.55) shown above spiked to a new 2012 high at $38.57, two days after the FOMC announced the third round of quantitative easing, and since then it has traded lower.

XLB is below its 21-day simple moving average at $37.09 and above its 50-day and 200-day SMAs at $36.20 and $35.81. My annual and monthly value levels are $35.72 and $34.78 with an annual pivot at $37.72 and weekly and quarterly risky levels at $38.24 and $39.78.

Back on Aug. 23, I wrote Gold Stocks Lag the Breakout in Gold Prices discussing how gold shares were lagging the precious metal. On Sept. 10, I updated this story in Gold Stocks Continue to Lag Gold and in both stories and in today's post I profiled Newmont Mining ( NEM).

On Aug. 23, Comex gold broke out above its 200-day simple moving average while NEM closed at $49.04, with its 200-day at $54.27. Then on Sept. 10, NEM closed at $51.36 with its 200-day at $53.26. The breakout for NEM came on Sept. 13 and on Sept. 21 trading as high as $57.93 for a gain of 18.1% since Aug. 23. Over the same time horizon gold gained 7.0%.

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: 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: is the price at which to enter a GTC limit order to sell on strength.

Alcoa ( AA) ($8.78 vs. $8.45 on July 31): this nonferrous mining stock continues to have a hold rating according to ValuEngine with an extremely elevated price-to-earnings ratio. Alcoa is below its 200-day SMA at $9.27.

The stock is set its 2012 high at $10.92 on Feb. 8 and set a 2012 low at $7.97 on July 25. The weekly chart is negative with the 200-week SMA at $11.84. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

DuPont ( DD) ($49.44 vs. $49.67 on July 31): This diversified chemicals stock continues to have a buy rating according to ValuEngine with a reasonable P/E ratio and is below its 200-day SMA at $50.22.

The stock set its 2012 high at $53.98 on May 1 and set a 2012 low at $46.16 on July 11. The weekly chart profile is negative with the 200-week SMA at $41.44. Investors and traders should sell strength to my monthly pivot at $50.45 then employ a "buy and trade" strategy between the value level and risky level.

Dow Chemical ( DOW) ($28.71 versus $28.84 on July 31): This diversified chemicals stock continues to have a buy rating according to ValuEngine with a reasonable P/E ratio. DOW is below its 200-day simple moving average at $31.79.

The stock set its 2012 high at $36.08 on April 25 with its 2012 low at $28.45 on Sept. 5. The weekly chart profile is negative with the 200-week SMA at $27.55. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Freeport McMoRan ( FCX) ($39.41 vs. $33.99 on July 31): This nonferrous mining stock continues to have a buy rating according to ValuEngine with a reasonable P/E ratio.

FCX is above its 200-day SMA at $37.67. The stock set is 2012 high at $48.96 on Jan. 26 and 2012 low at $31.08 on July 25. The weekly chart is neutral with the 200-week SMA at $37.97. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Monsanto ( MON) ($88.59 vs. $86.90 on July 31): This agriculture products company continues to have a buy rating according to ValuEngine with an elevated P/E ratio and is well above its 200-day SMA at $80.59.

MON set its 2012 high at $91.95 on September 21 after setting its 2012 low at $69.70 on May 18. The weekly chart is overbought and shifts to neutral this week given a close on Friday below its five-week modified moving average at $88.20. The 200-week SMA is $72.78.

Investors and traders should employ a "buy and trade" strategy between the value level and risky level. Monsanto released its fourth quarter earnings pre-market on Wednesday, and reported an EPS loss of 44 cents in-line with estimates. Revenue fell 6.1% to $2.11 billion well below the consensus of $4 billion. Shares fell 2.6% in Wednesday's trading.

The Mosaic Co ( MOS) ($54.89 vs. $58.35 on July 31): This fertilizer stock continues to have a Buy rating according to ValuEngine with a reasonable P/E ratio and tested its 200-day SMA at $54.54 on Wednesday. MOS set its 2012 high at $61.98 on September 7 after setting its 2012 low at $44.43 on June 4. The weekly chart is negative with the 200-week SMA at $56.78. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Newmont Mining ( NEM) ($55.47 vs. $45.26 on July 31): This gold mining stock now has a hold rating after being buy rated on both July 31 and Aug. 23. NEM has a reasonable P/E ratio and is above its 200-day SMA at $52.43.

NEM set its 2012 high at $64.62 on Jan. 12 and its 2012 low at $42.95 on July 27. The stock has a positive weekly chart profile with the 200-week SMA at $52.52. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

Vulcan Materials ( VMC) ($47.15 vs. $38.79 on July 31): This building materials stock continues to have a hold rating according to ValuEngine without a calculated P/E ratio with the stock above its 200-day SMA at $41.28.

VMC set its 2012 high at $49.99 on September 14 set after its 2012 low at $32.31 on June 5. The weekly chart profile is positive with the 200-week simple moving average at $43.48. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

United States Steel ( X) ($18.88 vs. $18.92 on July 31): This steel producer stock continues to have a hold rating according to ValuEngine with an extremely elevated P/E ratio with the stock below its 200-day SMA at $24.40.

U.S. Steel set a 2012 high at $32.52 on Feb. 3 and a 2012 low at $17.67 on June 12. The weekly chart is negative with the 200-week SMA at $38.57. Investors and traders should employ a "buy and trade" strategy between the value level and risky level.

The table of basic materials stocks shows that the most undervalued stock is U.S. Steel by 42.0% with Vulcan the only overvalued stock by 1.9%. The worst performer over the past 12 months is Newmont down 10.1% with Vulcan the best performer with a gain of 80.2%. Eight of nine stocks are expected to rally over the next 12 months by just 1.7% for Alcoa to 8.4% DOW. US Steel is expected to slide 1.2%.

Six of the nine stocks set their 2012 high in the first half of the year (AA, DD, DOW, FCX, NEM and X), while the others participated in the QE3 euphoria with 2012 highs set in September (MON, MOS and VMC). This mix of performances could be a symptom of early QE fatigue for the stocks that lagged year to date.

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.