Utilities Too Undervalued to Ignore?

August 4th, 3:15am August 4th, 9:58am

Sam CollinsSam Collins is InvestorPlace.com's Chief Technical Analyst. He has more than four decades of experience in Wall Street firms.In addition to providing fundamental and technical analysis for InvestorPlace.com, he provides FREE daily market commentary each trading day via the Daily Trader's Alert. The Daily Trader's Alert contains his Daily Market Outlook PLUS a Trade of the Day.Sam served as a regular army captain serving in West Germany during the Berlin Wall Crisis before joining Merrill Lynch as a futures broker. Since then, he has been a financial adviser, branch manager, regional manager and certified portfolio manager with national and regional securities firms. While he retired in October 2009, during his career, he received recognition and numerous awards.Sam used technical analysis as a timing and selection technique with portfolios that he managed. He developed a specific technical analysis technique and timing system called the Collins Bollinger Reversal (CBR) that has received national recognition, and he has appeared on local and national TV as a financial commentator.As an equity specialist and technician, he uses technical analysis as a selection technique along with fundamental analysis. As a value buyer, his goal is to find companies with outstanding management, unique products and strong financials that have not yet been driven to unreasonable prices. His CBR system helps him to screen vast amounts of data for stocks that meet those standards.Sam is also a member of the NASD Board of Arbitrators.

Energy stocks led the market lower on Monday. The steady decline in the price of crude oil continued to have a broad impact, dragging down other sectors. The Dow Jones Industrial Average fell 0.5%, and the S&P 500 and Nasdaq each lost 0.3%.

In addition to lower energy prices, more selling in Chinese stocks had a negative impact on the opening in New York. The Shanghai Composite lost 1.7% after China’s PMI hit a five-month low of 50. Analysts had expected a reading of 50.2.

Chevron Corporation (CVX) and Exxon Mobil Corporation (XOM) fell 3.3% and 1.5%, respectively, leading the market as they did on Friday. And light, sweet crude oil for September delivery dropped 4.1% at a final fix of $45.17 a barrel.

Other commodities continued to slide as well. Copper and aluminum fell to six-year lows. Gold lost 0.5% at $1,089.40 an ounce. These dramatic declines were said to reflect a lack of demand from China due to its weakening economic outlook.

The Dow Jones Utility Average jumped 0.7% after the release of positive economic data. Treasury bonds were also in demand. The 10-year benchmark note’s yield fell 4 basis points to 2.15%.

Personal income rose 0.4% in June. The consensus was for an increase of 0.3%. Personal spending was up 0.2%, and wages and salaries increased 0.2% as well, each meeting expectations. Friday’s jobs report is expected to have a significant impact on stocks as the Federal Reserve considers it a key number in the decision on interest rates.

On Monday’s close, the Dow Jones Industrial Average fell 92 points at 17,598, the S&P 500 lost 6 points at 2,098, the Nasdaq was down 13 points at 5,115, and the Russell 2000 lost 7 points at 1,232.

The NYSE traded total volume of 3.5 billion shares, and the Nasdaq crossed 1.8 billion shares. On the Big Board, decliners led advancers by 1.5-to-1, and on the Nasdaq, decliners led by 1.7-to-1.

Ever since its late-June low, the Dow Jones Utility Average has been showing strength. Note the bullish “V” forming on higher-than-average volume, the penetration of the index’s 50-day moving average, and Monday’s run at the 200-day moving average.

Monday’s high-volume close near the high of the afternoon in iShares Russell 2000 Index (ETF) (IWM) is bullish, especially following the break from a bearish channel. But bullish traders now have to face a pocket of resistance from about 122 to 123 that will be tough to penetrate.

Conclusion

The chart of the Dow Jones Utility Average is developing from a bullish “V.” This bottom making could be for several reasons. The economic numbers suggest the Fed may not be willing to raise rates this year for fear of stalling out the slow improving economy. Or perhaps utilities are just too undervalued for investors to ignore.

It is curious, though, that on the day President Obama announced a new program to reduce emissions that an industry that would be negatively impacted by the plan reacted with a rally after months of sloppy trading.

Today’s Trading Landscape

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

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