Stocks Facing Risk of Sequestration Price Cuts

NEW YORK (TheStreet) -- Wall Street analysts and buy side strategists continue the mantra that stocks are cheap. It seems like year-end price targets for the S&P 500 are raised almost daily. I disagree! I say that the S&P 500 faces a price sequestration as this index continues to lag my semiannual risky level at 1566.9 and its October 2007 intraday high at 1576.09.

While the S&P 500 lagged its semiannual risky level, the S&P 500 Sector SPDR (SPY) ($154.36) tested its semiannual risky level at $156.59 with a high of $156.80 on March 14. Investors and traders following my buy-and-trade strategies had the option to be short SPY at $156.59. SPY is above my monthly pivot at $153.16, which is the near term downside risk. My annual value level lags at $134.74.

Four Reasons Why Stocks are at Risk of Sequestration:

1. Stocks have been trading under a ValuEngine Valuation Watch or Warning for several weeks with more that 60% of all stocks overvalued. Today 63.5% of all stocks are overvalued.
2. Technically, the weekly chart profiles for all major averages show extremely overbought 12x3x3 weekly slow stochastic readings. For the S&P 500 this week's reading is 93.67, well above the 80.00 overbought threshold.
3. The major averages as a group have entered my zone of semiannual pivots / risky levels. The Dow Industrial Average is above its semiannual pivot at 14,323 with the S&P 500 and Russell 2000 below their semiannual risky levels at 1566.9 and 965.51 respectively.
4. This month the underpinnings of the market have deteriorated with numerous downgrades to leadership stocks, most notably in the transportation and construction sectors. As I explained in Sell-Rated Stocks a Source Of Funds transports and the homebuilders are a source of funds.

Today the construction sector is 24.4% overvalued and 130 stocks out of the 159 in this sector are rated strong sell or sell according to www.ValuEngine.com. With no buy-rated stocks, I say that the entire construction sector is now a source of funds. Here are three of the downgrades in this sector this morning:

KB Home (KBH) ($22.10) reported a loss of 16 cents per share for the quarter ended Feb. 28, which was better than the expected loss of 22 cents per share. The stock popped to a new multi-year high at $22.38 on Thursday versus my weekly pivot at $21.69 and annual risky level at $22.95. This morning the stock has been downgraded to strong sell from sell. KBH has become 40.4% overvalued and is projected to decline by 13.1% over the next 12 months. The stock has an elevated 12-month forward P/E of 76.2 and is trading with a market to book value of 4.5.

The manufacturer and distributor of building materials USG (USG) ($28.94) has been downgraded to sell. My semiannual value level is $25.90 with a monthly risky level at $31.21 versus the Feb. 13 multi-year high at $30.97.

Timber company Weyerhaeuser (WY) ($30.75) has been downgraded to sell. My semiannual value level is $24.11 with an annual pivot at $28.69 and monthly risky level at $32.40 versus the Jan 24 multi-year high at $31.73.

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