Downgrades Challenge Dow Theory Buy

NEW YORK (TheStreet) -- As the Dow Industrial Average and Dow Transportation Average set new all-time highs, nine components in the Dow 30 and four transportation stocks have been downgraded to hold from buy this week. These downgrades are significant and threaten the underpinnings of the stock market and the sustainability of the Dow Theory Buy signal confirmed on Tuesday.

At www.ValuEngine.com, we continue to show that stocks are fundamentally overvalued, with 61.6% of all stocks overvalued, 15 of 16 sectors overvalued, and 10 overvalued by double-digit percentages.

These 13 downgrades represent stocks in six overvalued sectors. Aerospace is overvalued by 6.8%; computer & technology by 14.8%; consumer discretionary by 9.2%; finance by 17.1%; oils-energy by 4.3%; and transportation by 19.2%. The finance stock downgraded is one of the four "too big to fail" money center banks.

As the major equity averages move higher, their weekly chart profiles become even more overbought technically. The 12x3x3 weekly slow stochastic readings are 93.16 for Dow Industrials and 94.27 for Dow Transports. (Readings above 80.00 are overbought on a scale of 00.00 to 100.00.)

Dow Theory confirmed a buy this week with Dow Industrials and Dow Transportation setting new all-time closing highs on Wednesday and Tuesday, at 14,296.24 and 6,136.72, respectively. The intraday all-time highs were set on Wednesday at 14,320.6 and 6188.58, versus my semiannual and weekly risky levels at 14,323 and 14,387 Dow Industrials and my weekly risky level at 6192 Dow Transports.

Before this week, 24 of 30 Dow components were rated buy according to ValuEngine, and today this underpinning is down to 15 of 30. In the Transportation Average, the underpinnings are even weaker with only five of 20 stocks rated buy down from nine of 20.

When key stocks lose their buy ratings, they become momentum trades which results in a new twist to my "buy and trade" strategy.

The strategy to reduce positions on strength to risky levels remains in play.

But with weaker underpinnings you may want to consider employing a sell stop on a close below a value level instead of buying weakness to a value level for stocks not rated buy.

An alternate exit strategy when trading stocks without a buy rating is to employ a sell stop on a weekly close below a stock's five-week modified moving average (MMA).

Reading the Table

OV / UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-Engine" rating is a Strong Sell, a "2-Engine" rating is a Sell, a "3-Engine" rating is a Hold, a "4-Engine" rating is a Buy and a "5-Engine" rating is a Strong Buy.

Last 12-Month Return (%): Stocks with a Red number declined by that percentage over the last twelve months. Stocks with a Black number increased by that percentage.

Forecast 1-Year Return: Stocks with a Red number are projected to decline by that percentage over the next twelve months. Stocks with a Black number in the Table are projected to move higher by that percentage over the next twelve months.

Here's my analysis of the downgraded Dow Industrials and Dow Transports stocks:

Boeing ( BA) ($79.08) traded to a new 2013 high on Wednesday at $79.28, just shy of its $80.65 high on May 2, 2011. The weekly chart profile is positive with the five-week modified moving average (MMA) at $76.48. My monthly value level is $72.96, with a weekly pivot at $74.07 and my quarterly risky level at $79.34.

Cisco Systems ( CSCO) ($21.72) traded to a new 2013 high on Wednesday at $21.79. The weekly chart profile is overbought with the five-week MMA at $20.87. My annual value level is $17.77 with a monthly pivot at $21.08 and semiannual risky level at $22.43.

CSX ( CSX) ($23.20) traded to a new 2013 high on Wednesday at $23.80, but remains shy of its $27.06 high on July 7, 2011. The weekly chart profile is overbought with the five-week MMA at $22.25. My monthly value level is $20.76, with a quarterly pivot at $22.31 and semiannual risky level at $28.19.

Chevron ( CVX) ($118.47) traded to a new multi-year high at $118.78 on Wednesday. The weekly chart profile is overbought with the five-week MMA at $115.34. My semiannual value level is $111.22, with my monthly risky level at $119.35.

Disney ( DIS) ($56.36) traded to a new multi-year high at $56.84 on Wednesday. The weekly chart profile is overbought with the five-week MMA at $54.27. My quarterly value level is $50.03, with a semiannual pivot at $54.91.

Hewlett-Packard ( HPQ) ($20.93) traded to a new 2013 high at $21.33 on Wednesday. The weekly chart profile is overbought with the five-week MMA at $18.12. My monthly value level is $13.24, with a weekly pivot at $20.39 and semiannual risky level at $24.31.

IBM ( IBM) ($208.38) is shy of its $211.79 high on Oct. 5, 2012. The weekly chart profile is positive with the five-week MMA at $201.74. My monthly value level is $199.79, with a weekly pivot at $207.93 and quarterly risky level at $228.38.

Intel ( INTC) ($21.75) is shy of its Jan. 17, 2003, high ($23.06), with the 200-day SMA at $23.13. The weekly chart profile shifts to positive with a weekly close above the five-week MMA at $21.13, but the 200-week SMA is a resistance at $21.83. My semiannual value level is $19.80, with a weekly pivot at $21.10 and quarterly risky level at $24.88.

JB Hunt Transport ( JBHT) ($69.69) traded to a new multi-year high at $71.85 on Wednesday, testing my weekly risky level at $71.64. The weekly chart profile is overbought with the five-week MMA at $66.70. My semiannual value level is $64.28.

JPMorgan Chase ( JPM) ($50.03) traded to a new multi-year high at $50.19 on Wednesday. The weekly chart profile is overbought with the five-week MMA at $47.94. My semiannual value level is $46.84, with a monthly pivot at $49.88 and weekly risky level at $50.61.

Norfolk Southern ( NSC) ($74.40) traded to a new 2013 high at $75.71 on Wednesday. The weekly chart profile is overbought with the five-week MMA at $70.54. My quarterly value level is $71.18, with a weekly pivot at $74.88 and annual risky level at $75.90.

United Parcel Service ( UPS) ($84.43) traded to a multi-year high at $84.87 on Feb 19. The weekly chart profile is overbought with the five-week MMA at $81.50. My semiannual value level is $80.21 with a weekly risky level at $86.79.

Exxon Mobil ( XOM) ($89.56) is shy of its Oct. 19, 2012, high ($93.67). The weekly chart profile is positive with the stock on the cusp of its five-week MMA at $89.28. My semiannual value level is $74.19, with a weekly pivot at $90.42 and monthly risky level at $92.33.

At the time of publication the author had no position in any of the stocks mentioned.

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

More from Opinion

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

Tuesday Turnaround in Politics: Is a Trade War on the Horizon?

Tuesday Turnaround in Politics: Is a Trade War on the Horizon?

Many Chip Stocks Look Cheap Here, as Long as the Economy Holds Up

Many Chip Stocks Look Cheap Here, as Long as the Economy Holds Up

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense