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TheStreet Open House

Fed-Induced Equity Bubbles Appear Ready to Pop

Stocks in this article: ^DJI ^IXIC ^DJT ^RUT

NEW YORK ( TheStreet) -- The Fed-induced stock market bubbles continued to inflate as October ended and as November began. The Dow Industrial Average set a new all-time high at 15,797.68 yesterday, which followed a new all-time high for the Dow transportation average set at 7131.80 on Monday. The latest all-time high for the S&P 500 was set at 1775.22 on Oct. 30 with the Russell 2000 matching that feat on the same day with an all-time high at 1123.26. The Nasdaq set its latest multi-year high at 3966.71 also on Oct. 30.

This first table shows that the ValuEngine valuation warning reached its severest 2013 levels on Nov. 6 when 83.3% of all stocks were overvalued, with 53.3% overvalued by 20% or more. This was partially caused by the rise in the yield of the 30-year Treasury bond to 3.75%.

The second table shows an overview of Sector Valuations as they were on Nov. 6. Note that 15 of 16 sectors were overvalued by double-digit percentages. We showed that 12 sectors were overvalued by 21.6% to 28.1%. The year to date gains are indeed impressive as are the gains over the last 12 months, but note that the P/E ratios are extremely elevated between 17.12 and 30.66.

After monthly benchmark revisions to ValuEngine data two interesting changes have occurred this morning. All 16 sectors are now overvalued as the basic materials sector shifted to 6.65% overvalued from 3.67% undervalued. The most overvalued sector is now multi-sector conglomerates at 31.07% overvalued vs. 25.47% on Nov. 6.

When the fundamentals are stretched we look at the technicals to determine when cycle highs can be confirmed. So far this year there have been three attempts to confirm cycle highs, but at least one of the five major averages did not shift to a negative weekly chart profile, thus a confirmation was thwarted and new highs followed.

Negative Divergences from the Daily Charts:

The daily chart for the Dow Industrial Average shifted to neutral from positive with the 50-day simple moving average at 15,298.31 and the new all-time intra-day high at 15,797.68 set on Thursday. The Dow ended the day below Wednesday's low at 15,628.72, which defines a key reversal day. Keep in mind that the Dow is up just 0.3% since its May high.

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