Get Out of These Sectors While the Getting is Good

by Sam Collins | September 19, 2013 2:27 am

On Wednesday, a surprise decision by the Federal Reserve to extend its bond purchasing program drove the major indices to new highs. U.S. Treasury bonds prices jumped as a result of the decision, which was based on continuing weakness in the economy.

Treasury bonds had the biggest one-day price increase since November 2011. The yield on the 10-year note fell to 2.71%. Gold and crude oil rallied and the U.S. dollar fell — a direct result of a cut in the Fed’s growth forecasts for the U.S. for 2013 and 2014.

Stocks jumped with the best-performing sectors being utilities and housing stocks. Emerging markets also had big gains.

At Wednesday’s close, the Dow Jones Industrial Average was up 147 points to 15,677, the S&P 500 gained 21 points at 1,726, and the Nasdaq gained 38 points at 3,784. The NYSE traded 817 million shares and the Nasdaq crossed 434 million. Advancers beat decliners on the Big Board by 5.6-to-1, and on the Nasdaq, advancers were ahead by 1.7-to-1. More importantly, up volume exceeded down volume on the NYSE by over 5-to-1.

Dow Chart
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Chart Key[1]

The Dow 30 exploded on the news of the Fed’s decision not to cut its stimulus plan. The Dow Jones Industrial Average, which has been stymied in prior attempts at a new high, broke to a new closing and intraday high Wednesday. Even though MACD is somewhat overbought, expect to see even higher highs.

Bond Chart
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The 20-year Treasury bond rallied from a flat support line on high volume but failed to penetrate its 50-day moving average. Given the Fed’s lack of clarity and Chairman Ben Bernanke’s comment that their decisions are “data dependent,” bond holders (and especially bond fund holders) should take this opportunity to sell. The trend is still bearish.

Conclusion: The Fed’s decision is evidence of a “dovish” bent, and their thinking is based on what they interpret as weak economic data, especially the poor employment situation in the U.S. In other words, despite better earnings for many companies, they don’t think that the overall economy can run profitably without their help.

And so the Fed has spoken, and investors should have learned by now that you “don’t fight the Fed” and win. Thus, the best course of action is to continue to buy stocks with solid earnings, established future growth, and a plan for excess cash.

Investors that are still in bonds, gold, oil, etc., will most likely experience a temporary rally. But the savvy ones will take this opportunity to sell these assets and put the proceeds to work in companies with a record of solid internal growth guided by smart management.

Stocks in the utility industry are extremely undervalued with solid growth records and high dividends. On Tuesday I highlighted the Dow Jones Utility Average as undervalued[2], and in the past several weeks, recommended Dominion Resources (D[3]) and ONEOK (OKE[4]) as purchase candidates. The biotech, oil shale, cloud computing and natural gas equipment sectors are also loaded with undervalued stocks.

Go for value and don’t chase the junk.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

  1. [Image]:
  2. I highlighted the Dow Jones Utility Average as undervalued:
  3. D:
  4. OKE:
  5. click here:
  6. click here:

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