Cisco Joins List of 11 Buy-Rated Dow Stocks as Fundamentals Deteriorate

NEW YORK (TheStreet) -- The U.S. stock markets have been trading under the cloud of a valuation warning for several months according to www.ValuEngine.com.

Today we show that 76.2% of all stocks are overvalued 42.4% by 20% or more. 15 of 16 sectors are overvalued 13 by double-digit percentages, of which eight are overvalued by 21% to 30.9%. Sector price-to-earnings ratios have become elevated between readings of 17.2 to 29.9.

Stock market strength has been artificially propped up by the Federal Reserve's monetary policy of a 0% to 0.25% federal funds rate since Dec. 16, 2008, nearly five years ago. On Sept. 13, 2012 the Fed launched QE3, the purchase of $40 billion a month of agency mortgage-backed securities. On Dec. 12, 2012, the Fed added QE4, the purchase of $45 billion a month of longer maturity U.S. Treasury notes and bonds. These policies have failed and the stock market has become vulnerable to what I call 'QE-Fatigue'.

The purpose of quantitative easing was to lower mortgage rates, but instead the 30-Year fixed rate mortgage is more than 100 basis points higher than before QE3 and QE4 were implemented.

In my opinion the rise in rates caused the weakness in the homebuilder stocks since they peaked on May 20. Stock price weakness then spread to community banks which peaked on July 24. The Regional banks peaked shortly thereafter on August 1. There are no buy-rated homebuilders and there are no buy-rated regional banks according to ValuEngine.

This table shows my suggested sector weightings within an overall continued recommendation allocations to stocks cut to at least 50%, with 50% in cash equivalents.

When overweighting the sectors shown; computer and technology, consumer staples, multi-sector conglomerates, retail-wholesale and utilities I have been suggesting investments in the buy-rated stocks in the Dow Industrial Average.

Cisco Systems ( CSCO) ($23.31) has recently been upgraded to buy from hold after declining from a multi-year high at $26.48 on Aug. 13. Annual and semiannual value levels are $22.76 and $22.39 with quarterly and monthly risky levels at $24.44 and $25.66.

Home Depot ( HD) ($74.49) remains buy-rated even after the stock fell below its 50-day SMA at $77.67 with the 200-day SMA at $71.45. My semiannual value level is $62.82 with a semiannual pivot at $74.11 and weekly and quarterly risky levels at $76.51 and $80.48.

Hewlett Packard ( HPQ) ($22.34) remains buy-rated even after plunging below its 50-day SMA at 25.33 on August 22. This puts a focus on the 200-day SMA at $20.55 with a semiannual pivot at $24.24 and weekly risky level at $24.33.

IBM ( IBM) ($182.27) remains buy-rated even after setting a 2013 low at $181.10 on Aug. 28. My annual value level is $171.70 with a weekly pivot at $183.12 and monthly risky level at $203.66.

Intel ( INTC) ($21.98) remains buy-rated with the stock trading back and forth around its 200-day SMA at $22.23. Weekly and annual value levels are $21.33 and $19.60 with monthly and quarterly risky levels at $24.60 and $25.38.

Coca Cola ( KO) ($38.18) remains buy-rated with the stock below its 50-day and 200-day SMAs at $39.94 and $39.44. My annual value level is $24.96 with a weekly pivot at $38.83 and quarterly and monthly risky levels at $42.46 and $42.70.

McDonalds ( MCD) ($94.36) remains buy-rated and is below its 200-day SMA at $96.13 last tested as resistance on Aug. 28. My weekly pivot is $94.71 with semiannual and annual pivots at $98.47 and $99.38 and annual risky level at $104.63.

Procter & Gamble ( PG) ($77.89) remains buy-rated with its 200-day SMA at $76.16. My quarterly and annual value levels are $75.68 and $75.13 with an annual pivot at $78.73 and semiannual risky level at $81.86.

AT&T ( T) ($33.83) remains buy-rated and below its 50-day and 200-day SMAs at $35.07 and $35.51. My semiannual value level is $32.14 with a weekly pivot at $33.93 and quarterly and monthly risky levels at $36.27 and $36.99.

Verizon ( VZ) ($47.38) remains buy-rated and below its 50-day and 200-day SMAs at $49.60 and $47.82. My semiannual value level is $42.34 with a weekly pivot at $46.71 and semiannual and quarterly risky levels at $49.86 and $51.28.

Wal-Mart ( WMT) ($72.98) remains buy-rated and below its 50-day and 200-day SMAs at $75.97 and $73.83. My semiannual value level is $61.55 with a semiannual pivot at $75.96 and weekly risky level at $76.54.

Over the weekend I found this graphic on http://www.advisorperspectives.com/dshort/. Look at the highs and lows of the ratio between assets allocated to equities vs. assets allocated to money markets. As the S&P 500 peaked in the year 2000 this ratio peaked at 3.09% then the bubble popped. At the S&P 500 bottom in late-2002 this ratio was down to 1.38. Just before the S&P 500 peaked in late-2007 this ratio hit 3.39. In 2009 after the S&P 500 bottomed the ratio slumped to 1.18. Today the ratio is at an all time high at 3.49, which is another fundamental warning of significant risk in the stock market.

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.

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