Book Profits in Overvalued Market

TheStreet.com

NEW YORK (TheStreet) -- The Dow Industrial Average ended last week above 14,000 for the first weekly close above that milestone since October 2007. The Dow closed above 14,000 the week of Oct. 6 to Oct. 13, 2007, and hasn't had a weekly close above 14K until now.

The yield on the 30-year US Treasury bond ended last week at 3.228% the highest yield since the end of March 2012. As this yield rises, stocks become less undervalued and more overvalued.

On Jan. 25 I wrote, Market Hasn't Peaked and in this post explained what it would take to call a market top.

The first condition is overvalued fundamentals and this morning www.ValuEngine.com shows that 65.2% of all stocks are overvalued, which is what we call a "ValuEngine Valuation Warning." Sure stocks can become even more overvalued, but strength in an overvalued market is a reason to book profits.

At most market highs all 16 sectors are typically overvalued by double-digit percentages. Today all 16 are overvalued with 10 overvalued by double-digit percentages as shown in this table. Note that the trailing 12 months price-to-earnings ratios have also become elevated for 12 sectors.

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The weekly charts are not yet overbought for all of the major averages but this week the Dow Industrial Average and Nasdaq will join the S&P 500, Dow transports and Russell 2000 in overbought territory.

I am predicting a market top based upon my levels from my proprietary analytics which show upside potential to risky levels in February.

Strength in the Dow industrials should be limited to monthly and semiannual risky levels at 14,132 and 14,323.

Other monthly and semiannual risky levels are 1542.9 and 1566.9 S&P 500, and 3250 and 3583 Nasdaq.

Annual and semiannual risky levels are 5925 and 5955 Dow transports.

My monthly pivot and semiannual risk level are 911.32 and 965.51 on the Russell 2000.

The downside during the first quarter is to my quarterly pivots at 13,668 Dow industrials, 1431.1 S&P 500 and 3071 Nasdaq. Other downside targets are my annual pivot at 5469 on Dow transports, and my annual pivot at 860.25 on the Russell 2000.

Sometime during the year the downside risk is to my annual value levels at 12,696 Dow industrials, 1348.3 S&P 500, 2806 Nasdaq and 809.54 Russell 2000.

The most overvalued stocks I have been profiling are in or related to the construction sector. All of these stocks are above their 200-day simple moving averages, which is a warning of a reversion to the mean.

D R Horton DHI ($23.35) beat earnings estimates last week and traded to a new multi-year high at $24.29 Friday. DHI began the year with a buy rating and now has a hold rating with the stock 42.0% overvalued. My semiannual value level is $20.50 with a weekly pivot at $23.23 and monthly risky level at $24.10.

Goldman Sachs GS ($149.90) has underwritten many mortgage-related securities so the company has ties to the construction sector. GS has a hold rating with the stock 33.1% overvalued and traded to a new multi-year high at $150.39 on Friday. My monthly value level is $144.22 with a weekly risky level at $157.58.

Lennar LEN ($41.07) does not report quarterly results until March 26 and traded to a new multi-year high at $43.22 on Jan. 28. LEN began the year with a buy rating and is still buy rated, but is 56.3% overvalued. My semiannual value level is $36.03 with a weekly risky level at $43.72.

Lowe's LOW ($38.56) does not report quarterly results until Feb. 25, and the stock traded to a multi-year high at $39.26 on Jan. 25. LOW has a buy rating and is 32.0% overvalued. My quarterly value level is $31.71 with a monthly pivot at $38.37 and no risky levels.

Masco MAS ($18.55) reports quarterly earnings Feb. 11 and the stock set a new multi-year high at $18.82 Friday. MAS has a hold rating with the stock 37.9% overvalued. My semiannual value level is $14.76 with a monthly pivot at $18.57 and weekly risky level at $18.86.

Mohawk MHK ($102.42) reports quarterly earnings Feb. 21 and the stock set a multi-year high at $105.26 on Jan. 30. MHK has a hold rating and is 39.2% overvalued. My quarterly value level is $81.28 with a monthly pivot at $98.92 and weekly risky level at $106.85.

Mueller MLI ($54.07) reports quarterly earnings Feb. 13 and traded to a multi-year high at $54.30 Friday. MLI has a hold rating with the stock 31.4% overvalued. My monthly value level is $51.32 with a quarterly pivot at $52.88 and weekly risky level at $55.09.

PulteGroup PHM ($20.35) beat earnings estimates last week and traded to a multi-year high at $21.97 on Jan. 28 three days before announcing quarterly results. PHM still has a buy rating with the stock 33.9% overvalued. My annual value level is $14.00 with a weekly pivot at $22.26 and monthly risky level at $22.86.

Ryland Group RYL ($38.46) beat earnings estimates last week and traded to a multi-year high at $43.00 on Jan. 30. RYL continues to have a hold rating and is 48.3% overvalued. My quarterly value level is $28.90 with a weekly pivot at $41.07 and monthly risky level at $41.98.

Texas Industries TXI ($56.42) does not report quarter earnings until March 27 and traded to a multi-year high at $59.32 on Jan. 28. TXI has a hold rating and is 73.4% overvalued. My semiannual value level is $44.41 with a monthly risky level at $60.14.

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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