Difficulty Confirming Market Top

I was on Yahoo Finance Breakout on Thursday afternoon explaining the technical conditions that are necessary to confirm the May 20, May 22 highs for the five major equity averages; the Dow Industrial Average, the S&P 500, the Nasdaq, the Dow transportation average, and the Russell 2000. Here's the video: Friday's Close Will Determine if the Top Is in for Stocks: Suttmeier.

In my career I have always found it easier to call a market bottom than to call a market top. At a top it seems like momentum just won't stop as the bulls continue to buy weakness. At a bottom no one wants to buy, and that's when stocks are at their cheapest and the old-school dollar-cost averaging method is tossed out. Dollar-cost averaging is an important ingredient of my buy-and-trade strategy. The problem at a bottom is that investors neglected to book profits and raise cash at the prior top.

If the five major averages close unchanged from Thursday's strong closes the 12x3x3 weekly slow stochastic readings will be; 82.40 vs. 85.72 last week for the Dow Industrials, 80.38 vs. 83.76 last week for the S&P 500, 85.28 vs. 86.73 on the Nasdaq, 75.23 vs. 77.42 on Dow Transports, and 82.73 vs. 82.79 last week for the Russell 2000. All readings need to be declining below 80.00 to flag a momentum warning.

If all momentum readings were negative we would also need weekly closes below the five-week modified moving averages at 15,050 Dow Industrials, 1622.5 S&P 500, 3407 Nasdaq, 6296 Dow Transports, and 973.01 on the Russell 2000. These were tested during this week except on the Russell 2000.

When both the momentum condition and the moving average formations kick in the May 20/May 22 highs would be confirmed as cycle highs. I would give this another week to develop otherwise we will likely have new highs by the end of June. The bottom line is that the markets are poised for mid-year window dressing, or window undressing.

An important risk to consider longer term this year is the reversion to the mean which are the 200-day simple moving averages at 13,903 Dow Industrials, 1499.7 S&P 500, 3164 Nasdaq, 5636 Dow Transports and 887.36 Russell 2000. All major averages have crossed their 200-day SMA in every year of the new millennium except 2013 so far.

My annual levels have been also been tested every year in the new millennium and this year's annual levels are; 12,696 Dow industrials, 1348.3 S&P 500, 2806 Nasdaq, 5469 Dow transports and 809.54 Russell 2000.

The fundamentals justify at least a stock market correction as 70.0% of all stocks are overvalued according to ValuEngine. This valuation warning has been a cloud over the market since mid-March, but the technicals have trumped the fundamentals, 31.0% are overvalued by 20% or more. We show 15 of 16 sectors overvalued, 11 by double-digit percentages, with the computer and technology sector and the retail-wholesale sector tied for the most overvalued by 21.35%.

Trading the three most popular ETFs

SPDR Dow Jones Industrials ( DIA) ($151.76) tested and held its 50-day simple moving average at $149.61 on Wednesday and Thursday, which helped Thursday's rebound. My monthly value level is $147.17 with this week's risky level at $152.48 which was tested at Monday's high. Longer term my annual value level lags at $126.69.

PowerShares QQQ ( QQQ) ($72.76) almost tested its 50-day simple moving average at $51.52 on Thursday. My quarterly value level is $68.95 with this week's risky level at $74.63. Longer term my annual value level lags at $60.27.

SPDR S&P 500 ( SPY) ($164.21) tested and held its 50-day simple moving average at $161.36 on Thursday, which helped Thursday's rebound. My monthly value level is $160.58 with this week's risky level at $166.49. Longer term my annual value level lags at $134.74.

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.