Stocks Remain Overvalued but Resilient

NEW YORK (TheStreet) -- On Aug. 1 the Dow Transportation Average set a new all-time high at 6686.86 despite having a sector rating of "avoid-source of funds." The transportation sector has this rating because 70% of all stocks in this sector have sell or strong sell ratings according to www.ValuEngine.com.

The Dow Jones Industrial Average set its all-time high at 15,658.43 on Aug. 2, and 14 stocks in this benchmark index have buy ratings, as I noted on Aug. 1 in " August Begins With New Highs and New Risky Levels." These stocks still have buy ratings today. I have been suggesting that investors allocating cash to the stock market focus on the buy-rated Dow components with 50% of investment dollars in cash.

The S&P 500 set its all-time high at 1709.67 on Aug. 2, and 139 stocks, or just 27.8% of these stocks have buy ratings. A warning is that only 15 of these stocks are undervalued.

The Nasdaq set a new multiyear high at 3694.18 on Aug. 5, and in the Nasdaq 100 there are only 29 stocks with a buy rating. Of these, only six are undervalued.

The Russell 2000 set its latest all-time high at 1063.52 on Aug. 5. I do not have a breakdown for specific data points in this index.

After the first six trading sessions in August, the stock market remains overvalued but resilient.

My monthly pivot is 3663 on the Nasdaq. The semiannual risky level is 3759.

Monthly and semiannual risky levels are 16,188 and 16,490, respectively, for the Dow industrials.

They're 1742.5 and 1743.5, respectively, for the S&P 500.

For the Dow transports, they're 7087 and 7104, respectively. And for the Russell 2000, they're 1092.24 and 1089.42, respectively.

My quarterly value levels are 14,288 for the Dow industrials, 1525.6 for the S&P 500, 3284 for the Nasdaq, 5348 for the Dow transports and 863.05 for the Russell 2000.

My annual value levels are 12.696 for the Dow industrials, 1348.3 for the S&P 500, 2806 for the Nasdaq, 5469 for the Dow transports and 809.54 for the Russell 2000.

Here's a risk/reward table for the major equity averages for the remainder of 2013:

This table shows the upside percentage to semiannual risky levels and the downside risk to the annual value levels. For example, the upside potential for the Dow Industrial Average is 6.4%, while the downside risk is 18.1%.

My suggested allocation to the stock market begins with at least 50% in cash. Allocations to specific stocks should include companies among the following sectors, as well as the buy-rated Dow components.

Computer & Technology -- Overweight: There are four buy-rated Dow components in this sector. I suggest these two stocks:

Intel Corp ( INTC) ($22.45) has a buy rating, according to ValuEngine. Recent weakness is approaching its 200-day simple moving average at $22.16. My annual value level is $19.60, with a quarterly risky level at $25.38.

Microsoft ( MSFT) ($32.89) has a buy rating and is between its 200-day SMA at $30.05 and its 50-day SMA at $33.89. My annual value levels are $28.57 and $27.92, with quarterly and semiannual risky levels at $33.52 and $33.95, respectively.

Consumer Staples -- Overweight: There are two buy-rated Dow components in this sector.

Multi-Sector Conglomerates -- Overweight: There are three buy-rated Dow components in this sector.

Retail-Wholesale -- Overweight: There are three buy-rated Dow components in this sector. I favor these two:

McDonalds ( MCD) ($98.04) has a buy rating and is below its 50-day SMA at $98.72, with the 200-day SMA at $95.43. My semiannual and annual pivots are $98.47 and $99.38, respectively, with an annual risky level at $104.63.

Wal-Mart ( WMT) ($77.25) has a buy rating and is above its 50-day and 200-day SMAs at $76.30 and $73.80, respectively. My monthly value level is $76.14 with a quarterly risky level at $82.06.

Utilities -- Overweight: There are two buy-rated Dow components in this sector. I favor this one:

AT&T ( T) ($35.29) has a buy rating and is below its 50-day and 200-day SMAs converged at $35.53 and $35.54. My semiannual value level is $32.14 with a quarterly pivot at $36.27 and monthly risky level at $36.87.

Here are four more candidates to consider, two from the computer and technology sector, and two from the retail-wholesale sector:

Broadcom ( BRCM) ($26.30) has a buy rating as the stock slips to a new multiyear low at $26.30. My annual pivots are $30.97 and $32.91.

Cirrus Logic ( CRUS) ($19.91) has a buy rating and is above its 50-day SMA at $18.46 with the 200-day SMA at $24.31. My annual value level is $13.35 with an annual risky level at $20.74.

Dollar Tree ( DLTR) ($53.30) has a buy rating with its 50-day SMA at $51.66. My semiannual value level is $52.56 with a monthly pivot at $53.35 and a quarterly risky level at $59.83.

Ross Stores ( ROST) ($67.13) has a buy rating with a 50-day SMA at $65.80. My annual value levels are $54.55 and $51.52, respectively, with a monthly risky level at $67.94.

At the time of publication, the above stocks are in the model portfolio of Suttmeier's subscription product called The ValuTrader Model Portfolio.

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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