As Equities Become Risky, Consider Market ETFs

NEW YORK (TheStreet) -- Over the last week or two we learned that former Fed Chairman Alan Greenspan and our presumed next Fed Chairperson Janet Yellen do not think that U.S. equities are in a bubble. I disagree, but whenever it appears that the equity bubble is ready to pop it has not. Instead stocks have become more overvalued fundamentally and more overbought technically.

Today 84% of all stocks are overvalued according to www.ValuEngine.com with 52.8% overvalued by 20% or more. All 16 sectors are overvalued, 15 by double-digit percentages between 13.1% and 36.4%.

Under Greenspan and Bernanke Federal Reserve policy has been ill-advised as easy money created bubbles and all bubbles eventually pop. First it was housing in 2005, then it was the banks in 2007, crude oil in 2008 and gold in 2011. Some say that there is also a bond bubble, but I have disagreed with that notion as that bubble occurred in the early 1980's when Treasuries had double-digit yields.

So far in the new millennium we have had three equity bubbles. The first was the tech-bubble which popped in March 2000. Then it was bubble created by the formation of the Great Credit Crunch in October 2007. Today's stock market is the third bubble that does have room to inflate further, but in my judgment additional upside will be difficult to capture as an investor. The current bubble needs to have technical sell signals and so far this confirmation has been avoided three times since May.

Monetary policy created an equities bubble because a 0% to 0.25% federal funds rate that began in December 2008 has hurt the real economy on Main Street, while giving Wall Street the license to speculate. Adding QE3 and QE4 in the fall of 2012 did not sustain lower long-term yields as this policy can lead to inflation and hence the recent rise in Treasury yields. Fed policy was designed to keep yields low and instead rates are on the rise except for savers on Main Street.

While most strategists have been advising investors to avoid bonds, I have been providing buy-and-trade parameters for a popular bond ETF. While trading gold and crude oil may be speculative I have been providing buy-and-trade parameters for their respective popular ETFs. My last post covering these ETFs was on Nov. 15 in Yellen's Easy Money Further Inflates The Bubble.

iShares 20+ Year Treasury Bond  (TLT) ($102.43 vs. $104.52 on Nov. 14) traded as low as $102.16 on Nov. 21 then up to $104.93 on Nov. 26 staying below its 50-day simple moving average at $105.42. The bond ETF trades like a stock and approached this recent low with a low of $102.22 on Thursday. The buy-and-trade strategy assumes that these lows are a tradable short-term double bottom. The upside potential is to its 200-week SMA at $108.51 last tested in late October. This month's value level is $101.04 with my quarterly risky level at $111.43.

SPDR Gold Trust  (GLD) ($118.30 vs. $124.27 on Nov. 14) traded as low as $117.23 on Dec. 3 vs. the June 28 low at $114.68. The buy-and-trade strategy is making the judgment that this is a tradable low end of a trading range. The gold ETF has become oversold on its weekly chart with the five-week MMA at $123.17. My monthly value level is $102.38 with a quarterly risky level at $138.20.

Energy Select Sector SPDR Fund  (XLE) ($86.14 vs. $87.18 on Nov 14) has been above its 50-day SMA since Oct. 10, and today the 50-day is $85.77. The energy ETF is not a proxy for crude oil, it's a basket of energy stocks. The weekly chart is positive but overbought and a close today below its five-week modified moving average at $86.21 will shift this chart to neutral. The weekly chart for crude oil has oversold momentum and held its 200-week SMA at $92.03 last week. A close on oil above its five-week MMA at $96.88 shifts this chart to neutral. My semiannual value level for the energy ETF is $81.91 with a monthly pivot at $85.89 and semiannual and annual risky levels at $88.35 and $91.08.

If you are having difficulty picking stocks given recent moon-shot or woodshed reactions to earnings reports, you can book profits on specific stocks than allocate fewer dollars into these popular market ETFs.

SPDR Dow Jones Industrial Avg ETF Fund  (DIA) ($158.12 vs. $158.69 on Nov. 14) set a new all-time high at $161.58 on Nov. 29 which was a test of this month's pivot at $160.99. Diamonds tested its 200-day SMA back on Oct. 9 and has been above its 50-day SMA since Oct. 16. Today these moving averages are supports at $155.43 and $151.09 respectively. The weekly chart is positive but overbought with the five-week MMA at $157.36. If the equity bubble pops the downside risk is to my annual value level at $126.69. If the bubble continues to inflate my semiannual and quarterly risky levels are $164.06 and $167.20.

PowerShares QQQ Trust Series 1  (QQQ) ($85.38 vs. $83.80 on Nov. 14) set a new all-time high at $85.96 on Dec. 2 which is above my quarterly pivot at $85.11. This level was tested as a magnet on Dec. 4. This tech heavy ETF has been above its 200-day SMA all year long and this major support is at $75.06. The weekly chart is positive but overbought with the five-week MMA at $83.19. My semiannual value level is $80.87 with a monthly risky level at $86.51. If the new tech bubble pops the risk is to my annual value level at $60.27.

SPDR S&P 500 ETF Trust  (SPY) ($178.94 vs $179.23 on Nov. 14) set a new all-time high at $181.75 on Nov. 29 which was a test of this month's risky level at $181.55. The ETF that matches the performance of the S&P 500 has been above its 200-day SMA all year long and this major support is at $165.69. The weekly chart is positive but overbought with the five-week MMA at $177.20. My semiannual value level is $174.10 with the monthly pivot at $181.55 and quarterly risky level at $185.04. If the bubble pops the risk is to my annual value level at $134.74.

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 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

More from ETFs

Video: What to Expect From Alphabet, Amazon and Facebook's Earnings This Week

Video: What to Expect From Alphabet, Amazon and Facebook's Earnings This Week

The Rally in Bank Stocks Could Get Hotter With These Fresh Earnings Beats

The Rally in Bank Stocks Could Get Hotter With These Fresh Earnings Beats

Video: Jim Cramer on How to Trade This Market as Bank Earnings Begin Friday

Video: Jim Cramer on How to Trade This Market as Bank Earnings Begin Friday

Jim Cramer on Why Gap Is Bullish on Facebook and Social Media Advertising

Jim Cramer on Why Gap Is Bullish on Facebook and Social Media Advertising

How to Make Your Bitcoin an Investment

How to Make Your Bitcoin an Investment