STOCKS

For much of 2012, investors have been searching for stocks with attractive yields, but MoneyShow’s Tom Aspray points out that income investors should also use technical analysis to help them avoid the “high-yield disasters.”

As the yield on the ten-year Treasury Note has fallen from a March high of 2.39% to a July low of 1.39%, investors have been disparately searching for stocks and ETFs that have more attractive yields.

Some forget that stocks that offer much higher yields than others also have a higher level of risk. Of course, the best combination is to buy a stock or ETF that has an attractive yield and also appreciates in value. For example, the iShares S&P US Preferred Stock Index Fund (PFF) closed 2011 at $35.62, and was yielding over 7%. PFF has also gained almost 11% so far in 2012.

Too often, investors will choose the stock with the outsized yield, only to see it drop significantly in value as the capital loss far outpaces the seemingly attractive yield. These three stocks have been a big disappointment to investors and provide a good example of why the income investor should not ignore the charts of their income picks.

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Chart Analysis: Supervalu (SVU) is a $478 million grocery store company that received some attention earlier in the year as a turnaround candidate, and also because of its attractive yield.

  • The weekly chart shows that SVU peaked in early 2010, making a higher high of $17.89 (line a).

  • At the time, the relative performance or RS analysis has forming lower lows (line b), which was not an encouraging sign.

  • Since 2010, SVU shows a clear downtrend, as there is a pattern of lower highs (line c) and lower lows (line d). For income investors, buying a stock in a downtrend is a bad strategy.

  • In the middle of 2011, the RS line broke to new lows, and by the end of January 2012, it started to drop more sharply (line 1).

  • By early 2010, the weekly on-balance volume (OBV) had already started to make lower lows (line f), and this trend has continued over the past two years.

  • The OBV broke support (line g) early in the year, and has since dropped 68%.

  • SVU now yields over 16%, and still looks weak technically.

Commonwealth REIT (CWH) is a $7.4 billion office and industrial real estate investment trust that has been frequently recommended. It currently yields over 13%.

  • In 2007, CWH traded as high as $54.68, before dropping to a low of $6.28 in 2008. CWH rebounded to a high of $33 in early 2010, but then dropped sharply.

  • For most of 2010, CWH formed a trading range (lines h and i). This year-long trading range was resolved in July 2011 (line 2), and CWH dropped 33% in the next four months.

  • The break in price support was confirmed by a drop in the relative performance below its support (line j).

  • The RS line has been in a well established downtrend since 2010.

  • The OBV broke its support (line n) in May, almost two months ahead of prices, and volume surged in July 2011.

  • CWH formed a new trading range or continuation pattern from November 2011 through August 2012 (lines l and m).

  • This trading range was completed last month, as CWH has dropped over 23% from the July highs.

  • The weekly OBV and RS lines have both broken support, confirming the weak price action.

NEXT: Using Multiple Time Frames to Confirm Trends

Tickers Mentioned: CLF, SVU, CWN