Sell-Rated Stocks a Source of Funds

NEW YORK ( TheStreet) -- As major equity averages power to new multi-year highs or new all-time highs, individual stocks are becoming overvalued fundamentally, and their weekly chart profiles become overbought technically. Recently, this process has resulted in numerous stock-specific downgrades to sell, particularly in the transportation and construction sectors.

The stock market has been operating under a valuation watch or warning consistently in 2013. A watch is when 60% to 65% of all stocks are overvalued and a warning is when 65% or more of all stocks are overvalued. Today, this measure is a warning at 65.2%. As an added concern, 15 of 16 sectors have been overvalued, with 14 overvalued by double-digit percentages, led by consumer staples overvalued by 27.1%, transportation by 26.1% and construction by 25.1%.

My reading of technical momentum is a 12x3x3 weekly slow stochastic where readings above 80.00 on a scale of 00.00 to 100.00 are overbought. All major averages have mojo readings above 90.00.

So far in March, has downgraded numerous stocks to sell. In addition, when a stock rated hold or buy reaches its one-year price target, it becomes a source of funds at least on a partial sale in a buy-and-trade strategy.

When Apple ( AAPL) ($452.08) traded above $700 per share on Sept. 21, 2012, the stock reached the ValuEngine one-year price target at that time, where it became a partial source of funds. On Wall Street, analysts covering Apple raised their price target.

On March 6, I wrote Apple Buy, Google Hold, Amazon Sell, and followed with Apple Wins the Search for Value on March 14. Apple tested my annual value level at $421.05 on March 4 and March 5, while Wall Street was lowering its price targets. Today, Apple remains buy-rated, is 19.5% undervalued and has a one-year price target at $480.41. My semiannual pivot is $470.21, with my annual risky level at $510.64.

Amazon ( AMZN) ($257.28) had a sell rating on March 6 and was thus a source of funds when it traded between my monthly pivot at $275.15 and my weekly risky level at $277.07.

Google ( GOOG) ($814.71) had a hold rating on March 6 and when it spiked to a new all time high at $844.00 it was a partial source of funds testing the ValuEngine one-year price target at $841.81. Wall Street celebrated the record high with raised price targets, not a call for profit-taking.

On March 18, I wrote 12 Sell Downgrades Threaten Dow Transports and Con-Way ( CNW), JB Hunt Transport ( JBHT), Norfolk Southern ( NSC) and Old Dominion Freight ( ODFL) had sell ratings and were thus a source of funds.

This morning, US Airways ( LCC) has been downgraded to sell and becomes a source of funds.

On March 19, I wrote Sell Downgrades Weaken Homebuilder Foundations, and seven of eight homebuilder stocks profiled in this post were sell-rated and thus a source of funds. On Wednesday, DR Horton ( DHI) traded above its weekly risky level at $25.02, KB Home ( KBH) could have been sold as a source of funds on strength to my weekly risky level at $21.69, and Lennar ( LEN) traded above my monthly risky level at $42.27.

This morning, Toll Brothers ( TOL) becomes a source of funds on a downgrade to sell from hold, and the stock tested its monthly risky level at $36.49 yesterday. Within the construction sector, every homebuilder now has a sell or strong-sell rating.

Other Notable Sell Rated Stocks That Are a Source of Funds:

Boeing ( BA) ($85.37): My quarterly value level is $79.34 with a weekly pivot at $82.63 and annual risky level at $88.82

Ford Motor ( F) ($13.36): My quarterly value level is $6.98 with a monthly pivot at $13.11 and semiannual risky level at $15.71.

General Motors ( GM) ($29.10): My annual value level is $20.40 with a weekly pivot at $26.79 and monthly risky level at $30.59.

Let me reiterate that there is nothing wrong with profit-taking. It is much easier to book profits and raise cash on stock-specific strength. My suggested allocation to stocks is a maximum of 50% given overvalued valuations, overbought technicals and now the wave of downgrades.

I have no positions in the stocks mentioned today, and no other conflicts.

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.