Warning Flags Fly, But Stock Top Unconfirmed

NEW YORK ( TheStreet) -- Dow transports and Russell 2000 were the leaders to new all time highs in mid-March. Since then these two have been the laggards. The Dow industrials and S&P 500 performed like a sling-shot to all time highs on April 11 with the Nasdaq setting a multi-year high the same day. Since then the Dow industrials have held up the best among the five, but Dow utilities is now the best performer year to date with a multi-year high set on April 15.

This configuration is a flight to defense in the equities market, a negative divergence overall.

The other U.S. capital markets also provide warning flags for U.S. equities.

There is no bond bubble as the yield on U.S. Treasury 10-year has declined on a "flight to quality" out of risky assets which includes U.S. stocks in general. This yield moved above my annual pivot at 1.981% to 2.087% into March 8 then began to decline before equities peaked. This yield could decline to my semiannual risky level at 1.413%.

The gold bubble ended in 2011 and the precious metal is now below its 200-week simple moving average at $1435.3 after being above that key support since 2002. It appears that investors do not need a hedge against inflation or deflation, and with the stronger dollar, the idea that gold is a currency of last resort is off the table for now. Given the weakness in gold and other commodities the basic materials sector has become 15.6% undervalued. Only 18 stocks in this sector of 418 stocks have buy ratings and with 162 rated sell, this sector is rated underweight in my judgment.

The crude oil bubble popped in 2008 and with huge supplies of oil now in storage a trend below its 200-week simple moving average at $87.45 appears possible which would indicate risk to my quarterly value level at $79.66. Crude oil has been trading back and forth around its 200-week SMA since mid-2009 and the oils-energy sector is now 1.5% undervalued. This sector consists of 565 stocks with only 28 rated buy and with 134 rated sell, so this sector is also rated underweight.

I began to be concerned about the leadership of the Dow transportation average and on March 18 I wrote, 12 Sell Downgrades Threaten Dow Transports. This average peaked the next day setting an all time high at 6291.65, up 18.6% for 2013. Now after a sell-off transports are up 12.0% year to date. The transportation sector is 12.2% overvalued. Among the 186 stocks in this sector there are only four buy rated names and 146 stocks or 78.5% rated sell or strong sell. This sector remains "avoid-source of funds" rated.

On March 21, I wrote Sell-Rated Stocks a Source of Funds and here's a quick update of some of the stocks profiled that day:

Amazon ( AMZN) ($259.42 vs. $257.28 on March 21) had a sell rating when the stock tested $277.40 on March 12 and today the stock has been downgraded to strong sell with the stock 5.0% overvalued and with a one-year price target at $224.94. The stock has a 12-month forward P/E of 152.6 and trades at 20.8 times book value. I show semiannual and annual value levels at $241.23 and $226.80 with a quarterly risky level at $278.28 vs. the all-time high of $284.72 set on Jan. 15. Amazon reports quarterly results on April 25 and is expected to earn 10 cents per share.

Boeing ( BA) ($86.12 vs. $85.37 on March 21) had a sell rating, but was upgraded to hold shortly the March 21 post. Boeing reports quarterly results pre-market on April 24 and is expected to earn $1.47 per share. My monthly value level is $77.99 with annual and semiannual risky levels at $88.82 and $89.98 vs. the multi-year high at $89.46 set on April 11. Buy-and-trade investors could have booked profits on that strength between $88.82 and $89.98.

Ford Motor ( F) ($12.75 vs. $13.36 on March 21) still has a sell rating and reports its quarterly results pre-market on April 24 and is expected to earn 41 cents per share. My quarterly value level is $8.51 with a monthly risky level at $14.45.

General Motors ( GM) ($28.98 vs. $29.10 on March 21) still has a sell rating and reports quarterly results pre-market on May 2 and is expected to earn 63 cents per share. My annual value level is $20.40 with a monthly risky level at $32.55.

On March 26 I wrote, Allocate U.S. Holdings to 14 Top Dow Stocks. Since this post two of these have been downgraded to hold. I will recap these and profile next week's earnings from nine Dow components on Monday through Wednesday. I still consider buy rated Dow stocks as appropriate names in an investment portfolio with allocations to stocks reduced by 50%.

On April 2 I wrote, Dow Utilities Outperform S&P 500 in First Quarter where I showed that stocks in this sector were heavily weighted to buy rated stocks. This sector is 7.9% overvalued, but among the 215 stocks in the sector we have 64 stocks rated strong buy and another 130 rated buy. The utilities sector contains 64.0% of all strong buy stocks in the ValuEngine universe. With 78.4% of all stocks in this sector buy rated, I give the sector an overweight rating.

The Dow utility average set a multi-year high at 524.35 on April 16 and is now the best performing index year to date, up 15.0% compared to 8.1% for the S&P 500.

To sum it up, the buy rated stocks have migrated to the safely of utilities stocks and the brand names of the Dow industrial average. The Dow transports and Russell 2000, which led to new all time highs in mid-March, are trying to lead U.S. equities into a bear market.

Looking at my semiannual levels, a weekly close below 1566.9 on the S&P 500 indicates risk to 14,323 Dow industrials. Annual and semiannual pivots have been magnets at 5925 and 5955 on Dow transports. The Russell 2000 remains well below its semiannual risky level at 965.51.

With the neutral zone between 14,323 Dow industrials and 1566.9 S&P 500 intact a market top cannot yet be confirmed but the warning flags wave. A weekly close below my semiannual value level at 14,323 on Dow industrials is my signal calling for a market top.

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.