Risky Levels Loom as Stocks Are Overvalued, Overbought

NEW YORK (TheStreet) -- My major theme for the teenage years of the new millennium is that U.S. stocks are a risky asset class beginning in 2013. When I presented this theme as the year began, I also explained that there was upside first to my longer term risky levels.

On Jan. 2 I wrote, The Stock Market Is a Risky Asset Class in 2013 and explained that while some upside potential remained that the downside risk exceeds the upside potential. This scenario remains in play.

On Jan. 4 I presented my 10 Themes for the New Millennium Teen Years and periodically I will focus on these themes throughout the year. My first 5 themes cover the housing market and banking system and I will soon be able to digest the FDIC Quarterly Banking Profile for Q4 2012. I will provide my unique analysis of this important data soon after it becomes public.

On Jan. 25 I explained why the Market Hasn't Peaked yet based upon the possibility that the fundamentals can become even more overvalued and that the weekly charts for the major averages were not yet overbought.

On Feb. 4 my recommendation was to Book Profits in Overvalued Market as www.ValuEngine.com issued a ValuEngine Valuation Warning with more than 65% of all stocks overvalued. I also noted that the weekly charts for all major averages were not yet overbought, so this call indicated that there continued to be upside to risky levels.

Today we show that 64.2% of all stocks overvalued and that all major equity averages have overbought weekly chart profiles. All 16 sectors are overvalued with 11 sectors overvalued by double-digit percentages. The most overvalued sectors are transportation by 22.6%, industrial products by 21.3% and construction by 24.9%.

Since ValuEngine data comes from industry sources, why do most strategists both on the buy side and sell side say that the stock market is cheap? While price-to-earnings ratios may be below ranges of previous market tops for the S&P 500, we have measures by sectors that are based upon data for more than 7,000 companies. For example, the trailing 12 months P/E are 38.8 for the computer and technology sector and 49.7 for the construction sector. At the opposite end of the spectrum the auto-tires-trucks sector has a P/E of 15.7.

Technically my measure of momentum is the "12x3x3 weekly slow stochastic" and readings above 80.00 indicate that the major equity averages are overbought at; 87.82 on Dow industrials, 90.20 on S&P 500, 87.55 Nasdaq, 82.95 on Nasdaq 100 Index, 94.10 Dow transports, 92.83 Russell 2000, and 90.23 on the Philly Semiconductor Index.

The next component of timing a market top is testing longer term risky levels from my proprietary analytics. This began with the Dow transportation average which ended Thursday at yet another new all-time closing high at 5947.70, between my annual pivot at 5925 and my semiannual risky level at 5955.

My recommended strategy in this market environment is to sell strength to risky levels and to reduce exposures to the stock market by at least 50%. This gives you the cash to buy weakness to value levels later in the year and beyond. Investors who doubled their money over the past four years can return to the invested dollars employed then, with the equivalent amount safely on the sidelines.

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

The Yield on the 10-Year Treasury Note (1.988%): The weekly chart favors higher yields, but my annual pivot at 1.981% remains a magnet preventing a significant rise in yields at this time. 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 ($1,626.9): The weekly chart becomes negative on a close today below the five-week modified moving average at $1,664.3. 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. A monthly close below $1,599.9 leaves this market without a value level.

Nymex Crude Oil ($96.67): The recent rally in oil has become overbought on the weekly chart. My monthly and quarterly pivots are $96.21 and $95.84 with my annual risky levels at $115.23 and $115.42. Keep in mind that the 200-week simple moving average has been a magnet since mid-2009 and this average is currently at $86.09.

The Euro vs. the Dollar (1.3391): The euro versus the dollar after trading as high as 1.3709 two weeks ago is pulling the weekly chart into overbought territory. A close today below the five-week MMA at 1.3311 shifts the weekly chart profile to negative. The euro is back below its 200-week SMA at 1.3530. My annual pivot is 1.3257 with a quarterly pivot at 1.3334 and monthly pivot at 1.3570. My semiannual value level lags at 1.2797.

The Dow Industrial Average (13,973): 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 October 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 (1521.4): Quarterly and annual value levels are 1431.1 and 1348.3 with monthly and semiannual risky levels at 1542.9 and 1566.9. These major risky levels are below the October 2007 high at 1576.09.

The Nasdaq (3199): Quarterly and annual value levels are 3071, 2806 and 2790 with my monthly risky level at 3250. My semiannual risky level is 3583.

The Nasdaq 100 Index (2771): Annual value levels are 2463 and 2385 with a quarterly and monthly risky levels at 2798 and 2871. My semiannual risky level is 3196.

The Dow Transportation Average (5947.70): My annual, monthly and quarterly value levels are 5469, 5440 and 5094 with my annual pivot at 5925 and semiannual risky level at 5955.

The Russell 2000 (923.76): 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 (431.08): 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.

I am projecting that my proprietary analytics will have weekly risky levels for all these major averages next week.

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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