Dow, S&P, Nasdaq Are Puffing Up the Bubble

NEW YORK (TheStreet>) -- The stock market has become intensely overvalued fundamentally and the weekly charts for the major averages have become extremely overbought.

A ValuEngine valuation warning occurs when more than 65% of all stocks become overvalued, and this began in mid-May. Today we show that 83.9% of all stocks are overvalued 52.8% by 20% or more. In addition all 16 sectors are overvalued 15 by double-digit percentages. We show that 10 sectors are overvalued by 30.6% to 37%. Sector price-to-earnings ratios are elevated between 18.15 and 31.1. The stock market is thus not cheap by any fundamental metric.

Last week ended with new all-time or multi-year intra-day highs for the major equity averages at 16,174.51 on the Dow Industrial Average , 1813.55 on the S&P 500 (SPY), 4069.70 on the Nasdaq , 7273.81 on the Dow Transportation average and 1147.00 on the Russell 2000 . Transports began this week extending its all-time intra-day high to 7304.49. The overbought readings for their 12x3x3 weekly slow stochastic are well above the 80.00 threshold between 91.05 and 95.74, but confirming market highs is not immanent.

As I have been saying; 'if you cannot confirm cycle highs, new highs will follow.' My market pulse shows the latest market highs and the upside potential to risky levels and the downside risk to value levels. In my judgment the upside in terms of the Dow Industrials is limited to 3.6% and 5.4% while the downside risk is 20.2%. 

The daily charts for the major equity averages are showing some negative divergences. The Dow Industrial Average shifts to negative with a close below its 21-day simple moving average at 15,889. The S&P 500 shifts to negative on a close below its 21-day SMA at 1785.7. The Nasdaq remains positive but overbought with the 21-day SMA at 3966. The Dow transportation Average shifts to negative with a daily close below its 21-day SMA at 7143. The Russell 2000 remains positive but overbought with its 21-day at 1112.44. 

The weekly charts are not yet showing any negative divergences. The Dow Industrial Average remains positive but overbought with its five-week modified moving average at 15,768. The S&P 500 remains positive but overbought with its five-week MMA at 1770.5. The Nasdaq remains positive but overbought with its five-week MMA at 3947. Dow transports remains positive but overbought with its five-week MMA at 7042. The Russell 2000 remains positive but overbought with its five-week MMA at 1110.32. 

The major equity averages have entered a zone of risky levels and some have become pivots. My monthly value level is 6941 Dow Transports with monthly pivots at 16,093 Dow Industrials, 1820.2 S&P 500 and 1143.82 Russell 2000, and weekly and monthly risky at 16,435 Dow Industrials, 1855.7 S&P 500, 4101 and 4114 Nasdaq, 7487 Dow Transports and 1152.68 Russell 2000.

Semiannual and quarterly pivots are 1743.5 S&P 500, 3759 and 4025 Nasdaq, 7104 and 7205 Dow transports and 1089.42 Russell 2000 with semiannual and quarterly risky levels at 16,490 and 16,775 Dow Industrials, 1853.8 S&P 500 and 1163.21 Russell 2000. If the stock bubble pops in December the risk is to my annual value levels at 12,696 Dow Industrials, 1348.3 S&P 500, 2806 Nasdaq, 5469 Dow transports, and 809.54 Russell 2000.

This week there has been a debate as to whether or not stocks are in a bubble. I have been saying that a bubble is inflating, but you don't know how high the major averages can go before the bubble bursts. 

Recent readings on the ISM surveys have been stronger than expected, which has some analysts talking QE tapering by the Federal Reserve. This morning we will find out it nonmanufacturing ISM keeps pace with the stronger than expected manufacturing readings. New home sales will give us a read on the market for new homes, and this afternoon the focus becomes the latest Fed Beige Book. 

Readings on holiday sales have been mixed question spending on Main Street, USA. According to the National Retail Federation consumers spent $57.4 billion over the Thanksgiving weekend, down 2.7% year over year. 

The U.S. economy has been generating what some economists call dead-end jobs, not career-starting opportunities. According to Opportunity Nation 2013, our country's overall poverty and income inequality are on the rise. These antidotes suggest that holiday sales will be challenged.

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.

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