The Dow Dumped the 3 Winners of 2013

NEW YORK (TheStreet) - In my opinion, the worst decision of 2013 was made by the S&P Index committee when it decided to remove Aloca (AA), Bank of America (BAC) and Hewlett-Packard (HPQ) from the Dow Jones Industrial Average. This decision was announced on Sept. 10 and on Sept. 23 Goldman Sachs (GS), Nike (NKE) and Visa (V) became Dow components.

The Dow lost the aluminum stock just as the company was benefiting from a resurgence of the automobile industry. Alcoa rallied 20% over the last three months since its exit from the Dow.

The Dow lost a "too big to fail" money center bank just as Federal Reserve stimulus was helping the bigger banks shore up their balance sheets. Bank of America gained 10.3% over the last three months.

The Dow lost a computing and imaging solutions giant just as the new CEO was successfully implementing the company's turnaround. Hewlett-Packard spiked 31.1% over the last three months.

The three new Dow stocks had gains over the last three months, but significantly below the gains of the former Dow members.

Adding an investment bank whose profitability hinges on risky proprietary trading just when the Volcker rule looms makes little sense to me. Goldman Sachs is up 6% since Sept. 23, lagging Bank of America by 4.3%.

Adding a provider of expensive athletic footwear and apparel when Main Street is likely to reduce discretionary spending seems inappropriate. Nike is up 12.1% since Sept. 23, lagging Hewlett by 19%.

Adding a credit card company when the Dow already has one does not make sense either. Once holiday spending ends many consumers will likely keep their credit cards in their wallets. Visa has a gain of 10.1% since Sept. 23, lagging Alcoa by 9.9%.

With these changes the Dow Industrial Average has new weightings among sectors:

There is one fewer stock in the basic materials sector, which is only 0.1% overvalued. The sector has an underweight rating as 59% of the 390 stocks in this sector have sell or strong sell ratings. Alcoa was downgraded to sell once it tested the $10 threshold last week. That's the time and reason to remove this stock.

There is also one fewer stock in the computer and technology sector, which is 31.7% overvalued but has an overweight rating as 51.1% of the 1,131 stocks in this sector have buy or strong buy ratings. Hewlett has a hold rating but is just 3% overvalued.

Swapping out Bank of America for Goldman keeps the finance sector with the same number of stocks in the finance sector, which is 24.1% overvalued. I give this sector an equal-weight rating as 83.5% of the 2,978 stocks in this sector have hold ratings. B of A is 25.8% overvalued while Goldman is 28.7% overvalued.

Adding Nike adds exposure to the consumer discretionary sector, which is 30.5% overvalued. I give this sector an equal-weight rating because 83.9% of the 392 stocks in this sector have hold ratings. Nike is overvalued by 34%.

Adding Visa adds exposure to the business services sector, which is 27.5% overvalued. I give this sector an equal-weight rating as 70.3% of the 229 stocks in this sector have hold ratings. Visa is overvalued by 31.7%.

Here are my buy-and-trade profiles for all six stocks:

Alcoa ($9.94 vs. $8.28 on Sept. 23 for a gain of 20%) was downgraded to sell from hold on Friday and is 28.7% overvalued with a gain of 14.3% over the last 12 months. The stock traded to a new multi-year intra-day high at $10.08 on Friday and has been above its 200-day simple moving average now at $8.48 since Oct. 15.

Alcoa has a positive weekly chart profile with the five-week modified moving average at $9.32 and the 200-week SMA at $11.00. My monthly value level is $8.61 with a weekly pivot at $9.64 and semiannual risky levels at $11.33 and $11.70.

Bank of America ($15.60 vs. $14.14 on Sept. 23 for a gain of 10.3%) has a hold rating and is 25.8% overvalued with a gain of 35.4% over the last 12 months. The stock traded to a new multi-year, intraday high at $15.98 on Nov. 25 and is above its 200-day SMA at $13.79. B of A has a positive but overbought weekly chart profile with the five-week MMA at $15.15. My quarterly pivot is $15.30 with monthly and annual risky levels at $16.03 and $17.07.

Hewlett-Packard ($21.20 vs. $27.79 on Sept. 23 for a gain of 31.3%) has a hold rating and is 3% overvalued with a gain of 92.6% over the last 12 months. The stock traded to a new multi-year, intraday high at $28.70 on Dec. 4 then as low as $26.29 on Dec. 13. It is above its 200-day SMA at $23.81. HP has a positive but overbought weekly chart profile with the five-week MMA at $26.21 and the 200-week SMA at $30.25. My monthly and semiannual value levels at $24.58 and $24.24 with weekly and semiannual risky levels at $29.27 and $29.68.

Goldman Sachs ($175.16 vs. $165.25 on Sept. 23 for a gain of 6%) has a hold rating is 28.7% overvalued with a gain of 35% over the last 12 months. The stock traded to a multi-year intra-day high at $175.80 on Dec. 19 and is above its 200-day SMA at $158.29. Goldman has a positive weekly chart profile with the five-week MMA at $167.48 and the 200-week SMA at $137.33. My monthly value level is $171.19 with a weekly pivot at $174.04 and semiannual and annual risky levels at $164.72 and $186.86.

Nike ($77.34 vs. $68.98 on Sept. 23 for a gain of 12.1%) has a hold rating and is 34% overvalued with a gain of 56.2% over the last 12 months. The stock traded to a new all-time intra-day high at $80.26 on Dec. 9 and is above its 200-day SMA at $66.88. Nike has a positive but overbought weekly chart profile with the five-week MMA at $76.92. My quarterly value level is $71.62 with a monthly pivot at $79.07 and semiannual risky levels at $95.72 and $97.58.

Visa ($215.97 vs. $196.24 on Sept. 23 for a gain of 10.1%) has a hold rating is 31.7% overvalued with a gain of 41.7% over the last 12 months. The stock traded to a new all-time intra-day high at $218.20 on Dec. 20 and is above its 200-day SMA at $184.39. Nike has a positive but overbought weekly chart profile with the five-week MMA at $204. This week's value level is $207.21 with a quarterly pivot at $217.35, which was tested at Friday's high.

At the time of publication the author held no positions in any of the stocks mentioned.

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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

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