Inflating Market Bubble Not Quite Ready to Pop

NEW YORK (TheStreet) -- The major equity averages began 2014 with three down days, followed by a strong rebound on Tuesday. This resiliency simply means that the market's inflating bubbles are just not ready to pop. This is not surprising, as pivots from my proprietary analytics have kept volatility trendless.

The S&P 500 ended 2013 at 1848.36, up 29.6% for the year. It set a new all-time intraday high at 1849.44 on the last day of the year. The warning is that the S&P began 2014 below my monthly pivot at 1847. Given this dynamic, the market needs a positive reaction to Friday's employment data for December. A weekly close above 1847 would mean another round of new highs -- if we do not see them Wednesday or Thursday first.

The Dow Transportation Average has been a market stabilizer by staying between its longer-term pivots despite a negative divergence on its daily chart. Transports have stayed above their semiannual pivot at 7245 after slipping below their second semiannual pivot at 7376 and their monthly pivot at 7327. Transports ended 2013 at 7400.57, up 39.4% -- the best performer among the five major averages. The transportation average set its all-time intraday high at 7410.25 on the last day of the year.

The daily chart for the transportation average shows a declining 12x3x3 daily slow stochastic reading. But the transports average stayed above its 21-day simple moving average at 7243.41 on Monday and Tuesday. A close below the 21-day SMA would be a short-term negative, putting the focus on the 50-day SMA at 7175.12. A close below the 50-day SMA would indicate risk to the 200-day SMA, rising at 6580. Transports have been above the 50-day SMA since Oct. 10, 2013, and above their 200-day SMA since Dec. 10, 2012.

Courtesy of MetaStock / XENITH

The Dow Industrial Average, Nasdaq and Russell 2000 have not yet tested value levels or risky levels yet this year, as choppy trading continues.

The Fundamentals -- ValuEngine shows that 85.1% of all stocks are overvalued, with 54% overvalued by 20% or more. It's tough to find value stocks when only 14.9% are undervalued, and only 4.9% are undervalued by 20% or more. All 16 sectors are overvalued, with 13 overvalued by 22.7% to 34.3%. A dangerously overvalued stock market is a reason to employ portfolio rebalancing strategies that put cash in the bank.

The Weekly Technicals -- All five major equity averages have positive but overbought weekly chart profiles defined by weekly closes above five-month modified moving averages and 12x3x3 weekly slow stochastic readings above 80 on a scale of 00.00 to 100.00. To confirm a cycle high, we need to have simultaneous weekly closes below five-week MMAs for all five major equity averages, with the stochastic readings declining below 80. That would be my signal that a major market top is happening, with risk to the 200-day simple moving averages which were not tested at all in 2013.

My prediction for 2014 is that the major equity averages will test their 200-day SMAs as a reversion to the mean. The 200-day SMAs have risen to 15,335 for the Dow Industrials, 1684.8 for the S&P 500, 3657 for the Nasdaq, 6580 for the Dow Transports and 1038.66 for the Russell 2000.

The Dow Industrial Average (at 16,530.94 vs. 16,576.66 on Dec. 31) was up 26.5% in 2013, setting an all-time intraday high at 16,588.25 on Dec. 31. The weekly chart profile is positive but overbought, with the five-week modified moving average at 16,179, and a 12x3x3 weekly slow stochastic reading at 91.86. My monthly, semiannual and annual value levels are 16,327, 16,245, 14,835 and 13,467. Quarterly and semiannual risky levels are at 16,761 and 16,860. The upside to 16,860 is only 2%, while the downside risk to 13,467 is 18.5%.

The S&P 500 (at 1837.88 vs. 1848.36 on Dec. 31) was up 29.6% in 2013, setting an all-time intraday high at 1849.44 on Dec. 31. The weekly chart profile is positive but overbought, with the five-week MMA at 1809.1, and a 12x3x3 weekly stochastic reading of 92.48. My semiannual and annual value levels are 1797.3, 1764.4, 1539.1 and 1442.1, with a monthly pivot at 1847.0, and quarterly risky level at 1896. The upside to 1896 is 3.2%, while the downside risk to 1442.1 is 21.5%.

The Nasdaq (at 4153.18 vs. 4176.59 on Dec. 31) was up 38.3% in 2013, setting a multiyear intraday high at 4177.73 on Dec. 31. The weekly chart profile is positive but overbought, with the five-week MMA at 4068, and a 12x3x3 weekly stochastic reading at 93.44. My semiannual and annual value levels are 3930, 3920, 3471 and 3063. Monthly and quarterly risky levels are at 4267 and 4274. The upside to 4274 is 2.9% while the downside risk to 3063 is 26.2%

The Dow Transportation Average (at 7287.76 vs 7400.57 on Dec. 31) was up 39.4% in 2013, setting an all-time intraday high at 7410.25 on Dec. 31. The weekly chart profile is positive but overbought, with the five-week MMA at 7206, and a 12x3x3 weekly stochastic reading at 90.82. My quarterly and annual value levels are 7086, 6249 and 5935. Semiannual, monthly and weekly pivots are at 7245, 7327 and 7376. I do not show a risky level, but the downside risk to 5935 is 18.6%.

Russell 2000 (at 1157.63 vs. 1163.60 on Dec. 31) was up 37% in 2013, setting an all-time intraday high at 1167.96 on Dec. 26. The weekly chart profile is positive but overbought, with the five-week MMA at 1137.73, and a 12x3x3 weekly stochastic reading at 89.24. My semiannual and annual value levels are 1133.29, 1130.79, 966.72 and 879.39. Quarterly and monthly risky levels are at 1180.35 and 1200.55. The upside to 1200.55 is 3.7% while the downside risk to 879.39 is 24%.

For the upside for the major equity averages, the key is weekly closes above all risky levels, as that would indicate further inflation of the parabolic bubbles. With no additional risky levels, you don't know how high the averages could go before the bubbles pops.

Warning flags would wave on weekly closes below the pivots at 1847 on the S&P 500 and 7245 on Dow Transports.

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

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