Stocks Are Still Overbought, but Signal of Top Hasn't Arrived

NEW YORK (TheStreet) -- The major equity averages traded lower last week, with day-to-day volatility around my monthly pivot at 3663 on the Nasdaq. The Nasdaq stayed well below its semiannual risky level at 3759.

All the other major averages stayed well below their monthly and semiannual risky levels, which are 16,188 and 16,490, respectively, for the Dow Jones Industrial Average; 1742.5 and 1743.5, respectively, for the S&P 500; 7087 and 7104, respectively, for the Dow Transports; and 1092.24 and 1089.42, respectively, for the Russell 2000.

This week we have weekly risky levels at 15,579 for the Dow industrials, 1703.7 for the S&P 500, 3699 for the Nasdaq, 6509 for the Dow transports and 1071.67 for the Russell 2000, which should limit the upside potential.

Fundamentally, the ValuEngine valuation warning continues, with 75.6% of all stocks overvalued with 42.1% overvalued by 20% or more. Fifteen of 16 sectors are overvalued, 14 by double-digit percentages. Six are overvalued by more than 20%.

Technically, four of the five major averages ended the week with overbought momentum on their weekly charts. The only average not overbought is the Dow transports.

With the stock market overvalued fundamentally and becoming overbought technically, we are on the lookout for a signal that would confirm the Aug. 1 through Aug. 5 cycle highs as a significant market top. This would require weekly closes below the five-week modified moving averages with momentum readings declining out of overbought territory.

To review, my measure of momentum is a 12x3x3 weekly slow stochastic reading, which scales from 00.00 to 100.00 where readings of more than 80.00 are overbought and readings of less than 20.00 are oversold.

The five-week modified moving averages are 15,362 for the Dow industrials, 1669.6 for the S&P 500, 3566 for the Nasdaq, 6440 for the Dow transports and 1026.63 for the Russell 2000.

All five averages must be in sync to confirm a market top. This requires simultaneous weekly closes below the five-week MMAs with all momentum readings declining to less than 80.00. Without having this confirmation, another round of new highs remains feasible.

Here's my up-to-date Market Pulse, which shows the upside potential to semiannual risky levels and the downside risks to annual value levels. For the Dow industrials the upside is 6.9% with 17.7% downside risk.

Here's the scorecard for the stocks that reported earnings results after the bell Thursday. These were previewed on Aug. 6 in, Groupon, Tesla and Priceline Headline Earnings Previews.

Molycorp ( MCP) ($6.69) missed EPS estimates by 9 cents by reporting a loss of 36 cents a share. The producer of rare earth oxide continues to have a sell rating, according to ValuEngine and closed Thursday at $7.41. The stock traded into the investor woodshed with a low of $6.21 on Friday, but the close was above its 50-day SMA at $6.44. My monthly value level is $4.74 with a weekly risky level at $7.49.

NVIDIA ( NVDA) ($14.49) beat EPS estimates by 3 cents by reporting EPS of 16 cents a share. The maker of 3-D graphics processors has a buy rating and closed Thursday at $14.70. The stock traded as low as $14.11 on Friday but closed above its 50-day SMA at $14.38. My quarterly value level is $11.20 with weekly and monthly pivots at $14.43 and $14.95 and semiannual risky level at $17.21.

Priceline.com ( PCLN) ($969.89) beat EPS estimates by 5 cents earning $9.05 a share. The online "name your own price" retailer continues to have a buy rating and closed Thursday at $933.75. The stock began Friday with a moon shot to $994.98, which is significantly greater than my semiannual pivot at $935.65. The stock ended the week below a new weekly pivot at $975.31. A buy rating means that the stock will gain at least 5% over the next 12 months. Priceline is projected to gain 8.4% which is a $1,050 price target.

Rackspace Hosting ( RAX) ($47.85) beat EPS estimates by 3 cents, by reporting EPS of 16 cents a share. The Web-hosting company still has a hold rating and closed Thursday at $44.22. The stock surged to $49.50 on Friday. The stock is trading between its 50-day SMA at $40.37 and its 200-day SMA at $54.96. My monthly value level is $35.36, with weekly and quarterly risky levels at $51.75 and $56.26.

At the time of publication, Suttmeier had no positions in 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.

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