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:
- 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.
- 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.
- 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.
- 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.
KB Home (KBH - Get Report) ($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 - Get Report) ($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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