The Stock Market Is a Risky Asset Class in 2013

NEW YORK (TheStreet) -- The new millennium is now a teenager and the beginning of the sixth year of what I call the great credit crunch. This has been an environment of record low U.S. Treasury yields, bubbles in gold and crude oil, a wide trading range for the dollar, and extreme downside for stocks followed by huge upside.

In attempting to characterize the investment climate since 2007 I studied some of the hidden meanings of "The Wizard of Oz" the story written by L. Frank Baum in 1900. We have all seen the movie version released on August 14, 1939. One interpretation is that Emerald City represented the Federal Reserve System. This means that Fed Chief Bernanke is the modern day Wizard of Oz.

When Bernanke coined the phrase "fiscal cliff" he did so to scare everyone, and to justify the smoke and mirrors of QE1 through QE4. However, when you look behind the curtain you find that Bernanke's monetary policy decisions created bubbles that eventually popped; first in housing, then the banking system, gold and crude oil. There is one bubble that continues thanks to the QE's and that's the stock market.

The Dow Industrial Average and S&P 500 set all-time highs in October 2007 followed by the great credit crunch and significant downside for stocks. In March 2009 stocks were extremely undervalued and key technical levels held, and the stock bubble began to re-inflate with the help of the QE's. Stocks peaked after QE3 was announced on Sept. 13, 2012, and today QE4 begins. Current monetary policy is now intended to give investors a sense of security to buy riskier assets. While I can't deny some upside potential, I believe that the stock market is a risky asset class in 2013 with downside risks exceeding the upside potential.

We begin 2013 with an overvalued stock market according to www.ValuEngine.com. We show that 51.8% of all stocks are undervalued with 48.2% overvalued. Fourteen of 16 sectors are overvalued, seven by double-digit percentages; construction by 20.4%, consumer staples by 15.8%, retail-wholesale by 14.1%, industrial production by 14.1%, finance by 12.0%, transportation by 11.0% and business services by 10.9%. The cheapest sector is oils-energy but is only undervalued by 1.9%.

Chart Courtesy of Thomson/Reuters

The monthly chart for the S&P 500 (1426.19) shown above ended 2012 positive but overbought with the QE3 high at 1474.51 set on Sept. 14 and the October 2007 high at 1576.09. My monthly and annual value levels are 1397.6 and 1348.3 with an annual pivot at 1400.7 and a quarterly pivot at 1431.1. My semiannual value level lags at 1073.9 with my semiannual risky level at 1566.9, which is just below the October 2007 high at 1576.09.

The Yield on the 10-Year Treasury Note (1.759%): My annual value level is 1.981% with a weekly risky level at 1.622% and semiannual risky level at 1.413%. My annual and semiannual value levels are 2.476% and 3.063% with this month's risky level at 1.349% and quarterly risky level at 1.027%.

Comex Gold ($1673.5): My annual value level is $1,599.9 with a monthly pivot at $1,673.8 and semiannual and quarterly risky levels at $1,719.2 and $1,802.9. My annual and semiannual risky levels are $1,852.1 and $1,939.4 versus the all time high of $1923.7 set in September 2011.

Nymex Crude Oil ($91.75): My weekly value level is $91.29 with quarterly risky level at $95.84. My monthly value level lags at $74.23 with annual risky levels at $115.23 and $115.42. My semiannual risky level at $129.97 is well below the July 2008 all time high at $147.27.

The Euro vs. the Dollar (1.3193): My semiannual and monthly value levels are 1.2797 and 1.2343 with weekly and annual pivots at 1.3200 and 1.3257 and quarterly risky level at 1.3334. My annual risky level is 1.4295. Note that the June 2010 low is 1.1880 with the May 2011 high at 1.4941.

The Overall Risk/Reward for U.S. Equities Annual value levels are 12,696 and 12,509 Dow Industrials, 1348.3 S&P 500, 2806 and 2790 Nasdaq, and 809.54 Russell 2000. Annual and quarterly pivots are 1400.7 and 1431.1 S&P 500, 3071 Nasdaq and 821.01 Russell 2000. Quarterly and semiannual risky levels are 13,668 and 14,323 Dow Industrials, 1510.0 and 1566.9 S&P 500, 3274 and 3583 Nasdaq, 5469 and 5925 Dow Transports and 860.25 and 965.51 Russell 2000.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.

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