Stocks Need Apple Blossoms to Continue Rally

NEW YORK ( TheStreet) -- We began the week with a ValuEngine Valuation Warning with more than 65% of all stocks overvalued, with the Dow Industrial Average above 14,000, and with the yield on the U.S Treasury 30-year bond approaching 3.25%. This negative fundamental backdrop did not include Apple ( AAPL), which has been undervalued for several weeks now.

Even with a down market Monday, all major equity averages except the Nasdaq 100 Index were overbought on their weekly charts with 12x3x3 weekly stochastic readings between 83.29 for the Nasdaq and 92.31 for the Dow transports. The Nasdaq 100 has a stochastic reading rising at 77.76, which is still below the 80.00 overbought threshold. While the markets became overbought, the weekly stochastic reading for Apple was extremely oversold with a reading well below 20.00 at 12.89.

With overvalued fundamentals and overbought technicals the market reality, my suggested investment strategy is to book profits and raise cash on strength to risky levels, not what the crowds on Wall Street are touting, which is stocks are cheap and to buy pullbacks.

It seems that whenever stocks are overvalued and overbought and at or near all-time highs investors want in when they should be booking profits. And vice-versa, whenever stocks are undervalued and oversold investors want out. Buying high and selling lows seems to happen at every market high and at every market low, including at the March 2009 lows.

The anomaly of Apple, the proverbial market leader to the upside, is that this stock has become a market drag. This leads to my conclusion that this undervalued and oversold stock must blossom for the stock market rally to continue. I last covered Apple on Feb. 5 in Bobbing for Apple, Amazon and Google Shares , where I showed $421.05 as my annual value level a semiannual pivot at $470.21 and my annual risky level at $510.63.

This morning Apple is blossoming above its semiannual pivot at $470.21 in pre-market trading on the news announced Thursday afternoon that the company will trim its cash hoard by $45 billion over the next three years, including special dividends.

Weekly Review of the Key Levels for the U.S. Capital Markets

The Yield on the 10-Year Treasury Note (1.950%): The weekly chart still favors higher yields, but my annual pivot at 1.981% remained a magnet after a testing 2.059% on Monday. The record low yield was set at 1.377% on July 25, which was before the Federal Reserve announced both QE3 and QE4. This implies that additional Fed purchases of longer dated U.S. Treasuries and mortgage-backed securities are factored into the overall structure of the bond markets. My annual and semiannual value levels are 2.476% and 3.063% with the annual pivot at 1.981% and a monthly risky level at 1.843%.

Comex Gold ($1671.8): The gold bubble popped at $1,923.7 in September 2011 and attempts to re-inflate the bubble have failed. The base of the popped bubble is the $1,525.0 level, which held at the end of 2011. My annual value level is $1,599.9 with semiannual, monthly, quarterly and annual risky levels at $1,719.2, $1,793.8, $1,802.9 and $1,852.1.

Nymex Crude Oil ($96.21): The oil bubble popped at $147.27 in July 2008, and the 200-week simple moving average has been a magnet since June 2009 and is now a support at $85.86. So far in February, my monthly and quarterly pivots at $96.21 and $95.84 have been magnets and my annual risky levels at $115.23 and $115.42 are well below the all time high.

The Euro vs. the Dollar (1.3391): The euro versus the dollar traded above its 200-week SMA at 1.3529 last week to a 52-week high at 1.3709. The euro is above quarterly and annual pivots at 1.3334 and 1.3257, and is back below a monthly pivot at 1.3570.

The Dow industrial Average (13,944): Quarterly and annual value levels are 13,668, 12,696 and 12,509 with monthly and semiannual risky levels at 14,132 and 14,323. The October 2007 high is 14,198.10 with the all-time closing high is 14,164.53 set on Oct. 9, 2007. We are tracking the all-time closing high because a new all-time closing high would confirm a Dow Theory Buy Signal.

The S&P 500 (1509.4): Quarterly and annual value levels are 1431.1 and 1348.3 with monthly and semiannual risky levels at 1542.9 and 1566.9. The October 2007 high is 1576.09.

The Nasdaq (3165): Quarterly and annual value levels are 3071, 2806 and 2790 with the Sept. 21, 2012 high at 3196.93 and my monthly risky level at 3250.

The Nasdaq 100 Index (2747): Annual value levels are 2463 and 2385 with a quarterly and monthly risky levels at 2798 and 2871.

The Dow Transportation Average (5887.34): Ended Thursday at yet another new all-time closing high, which is amazing considering that the transportation sector is 20.4% overvalued. My annual, monthly and quarterly value levels are 5469, 5440 and 5094 with annual and semiannual risky levels at 5925 and 5955.

The Russell 2000 (908.10): Annual, quarterly and annual value levels are 860.25, 821.01 and 809.54 with a monthly pivot at 911.32 and semiannual risky level at 965.51.

The PHLX Semiconductor Sector Index (419.26): Quarterly and annual value levels are 371.62 and 338.03 with a monthly pivot at 409.08, and quarterly and semiannual risky levels at 440.36 and 520.17.

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.