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As Equities Become Risky, Consider Market ETFs

NEW YORK (TheStreet) -- Over the last week or two we learned that former Fed Chairman Alan Greenspan and our presumed next Fed Chairperson Janet Yellen do not think that U.S. equities are in a bubble. I disagree, but whenever it appears that the equity bubble is ready to pop it has not. Instead stocks have become more overvalued fundamentally and more overbought technically.

Today 84% of all stocks are overvalued according to www.ValuEngine.com with 52.8% overvalued by 20% or more. All 16 sectors are overvalued, 15 by double-digit percentages between 13.1% and 36.4%.

Under Greenspan and Bernanke Federal Reserve policy has been ill-advised as easy money created bubbles and all bubbles eventually pop. First it was housing in 2005, then it was the banks in 2007, crude oil in 2008 and gold in 2011. Some say that there is also a bond bubble, but I have disagreed with that notion as that bubble occurred in the early 1980's when Treasuries had double-digit yields.

So far in the new millennium we have had three equity bubbles. The first was the tech-bubble which popped in March 2000. Then it was bubble created by the formation of the Great Credit Crunch in October 2007. Today's stock market is the third bubble that does have room to inflate further, but in my judgment additional upside will be difficult to capture as an investor. The current bubble needs to have technical sell signals and so far this confirmation has been avoided three times since May.

Monetary policy created an equities bubble because a 0% to 0.25% federal funds rate that began in December 2008 has hurt the real economy on Main Street, while giving Wall Street the license to speculate. Adding QE3 and QE4 in the fall of 2012 did not sustain lower long-term yields as this policy can lead to inflation and hence the recent rise in Treasury yields. Fed policy was designed to keep yields low and instead rates are on the rise except for savers on Main Street.

While most strategists have been advising investors to avoid bonds, I have been providing buy-and-trade parameters for a popular bond ETF. While trading gold and crude oil may be speculative I have been providing buy-and-trade parameters for their respective popular ETFs. My last post covering these ETFs was on Nov. 15 in Yellen's Easy Money Further Inflates The Bubble.

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