Consider These Dow Components for Your Stock Allocation

NEW YORK (TheStreet) -- Over the past six months or so I have been suggesting that investors book stock market profits and raise cash to at least 50% of assets that would normally be invested in stocks.

Allocations to stocks should focus on buy rated components of the Dow Industrial Average including General Electric ( GE), IBM ( IBM), Coca Cola ( KO), 3M Company ( MMM) and AT&T ( T).

My main reason for caution is that I believe that Federal Reserve policy is creating a stock market bubble. Fundamentally, this thought is supported by the ValuEngine valuation warning that continues to intensify. We now show that 84.4% of all stocks are overvalued with 52.9% overvalued by 20% or more. All 16 sectors are overvalued with 12 overvalued by 22% to 33.6%.

The technicals are now overbought on the weekly charts for the five major averages I follow. This week the Dow Industrial Average joined the S&P 500, Nasdaq, Dow transports and Russell 2000 with a 12x3x3 weekly slow stochastic reading at 80.68 above the 80.00 overbought threshold. The Dow's five-week modified moving average is 15,509. This configuration makes the weekly chart for the Dow positive but overbought.

Investors should consider these 12 Dow components as a portion of a 50% allocation to stocks. One of the stocks is undervalued by 13.6% and the other 11 are overvalued by 6.0% to 30%. One of the stocks is down 3.3% over the last 12 months, while nine have gains of 10.5% to 43.9%. Three are below their 200-day simple moving averages while nine are above.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

General Electric ($27.05) set a multi-year high at $27.19 on Nov. 7. This stock has a positive but overbought weekly chart profile with a monthly value level at $24.69 with a semiannual pivot at $26.68 and quarterly risky level at $28.47.

Home Depot ( HD) ($76.18) set its multi-year high at $81.56 back on May 22. The stock has been moving sideways to down since then and is above its 50-day and 200-day SMAs at $75.73 and $74.51. My semiannual value level at $74.17 held at the second half 2013 on Sept. 6. This week's risky level is $76.88.

IBM ($183.07) has been below its 200-day SMA since July 19 and traded to a 2013 low at $172.57 on Oct. 17. IBM is the only undervalued Dow component and it stayed below its 50-day SMA at $183.80 on Tuesday. My annual value level is $171.70 with a monthly risky level at $184.92 and the 200-day SMA at $196.21.

Coca Cola ($39.88) has been trading back and forth around its 200-day SMA at $39.81 since Oct. 28 after rebounding from a second half 2013 low at $36.83 on Oct. 7. My weekly value level is $39.15 with a monthly pivot at $40.87 and quarterly risky level at $42.74.

McDonalds ( MCD) ($97.66) has been trading back and forth around its 200-day SMA at $97.88 since August 15 and its second half 2013 low is $93.14 set on Oct. 9. My weekly value is $94.81 with a semiannual pivot at $98.47 and annual risky level at $99.38.

3M ($128.36) set a new multi-year high at $128.59 yesterday, which makes my quarterly risky level at $128.27 a pivot. My monthly value level is $125.50 with a weekly pivot at $127.95.

Procter & Gamble ( PG) ($82.80) set a new multi-year high at $83.10 on Thursday after trading as low as $73.61 on Aug. 30. My monthly value level is $80.01 with a semiannual pivot at $81.86.

AT&T ($35.17) has been trading back and forth around is 200-day SMA since May 29. The stock's second half 2013 low is $33.09 set on Oct. 8 and now AT&T is between its 50-day SMA at $34.57 and its 200-day SMA at $35.65. My semiannual value level is $32.14 with a monthly pivot at $35.17 and semiannual risky level at $38.14.

United Health ( UNH) ($69.95) set a multi-year high at $75.88 on Sept. 16 then traded as low as $66.72 on Oct. 28. The stock is now below its 50-day SMA at $71.54. My weekly Value level is $68.82 with a semiannual risky level at $73.01.

United Technologies ( UTX) ($107.45) set a multi-year high at $112.46 on Sept. 19 and currently rests on the cusp of its 50-day SMA at $107.07. My quarterly value level is $106.06 with a semiannual pivot at $107.61 and a monthly risky level at $109.13.

Verizon ( VZ) ($50.16) set a second half 2013 low at $45.08 on Sept. 3 and has been above its 200-day SMA at $49.08 since Oct. 17. My semiannual value level is $49.86 with a weekly pivot at $50.15 and monthly risky level at $52.68.

Wal-Mart ( WMT) ($78.71) set a second half 2013 low at $71.51 on Oct. 7 and has been above its 200-day SMA at $75.29 since Oct. 17. My semiannual value level is $74.96 with a weekly pivot at $77.33 and quarterly risky level at $80.09.

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 is the chief market strategist at AlphaPlus Analytics in addition to ValuEngine.com. He has been a professional in the U.S. Capital Markets since 1972, transferring his engineering skills to the trading and investment world.

Suttmeier has an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. He became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gives him the insights to be an expert on monetary policy, which he features in his newsletters, and market commentary.

Suttmeier's industry licenses include, Series 7 and Registered Principal (Series 24). He has been the Chief Market Strategist for ValuEngine.com since 2008 and often appears on financial TV.

Click here for details on Suttmeier's "Buy and Trade" investment strategy.

Richard Suttmeier can be reached at RSuttmeier@Gmail.com

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