Don't Believe Stocks Are Still Cheap

TheStreet.com

NEW YORK (TheStreet) -- This week all five major equity averages set a series of new all-time highs, or multi-year highs. As this occurred the pundits on financial TV called for S&P 1700 saying that stocks were still cheap. At ValuEngine we disagree.

This morning we show that 66.3% of all stocks are overvalued, where readings above 65% define a ValuEngine valuation warning, which typically occurs prior to a market top. Today we show that 26.6% of all stocks are overvalued by more than 20%. We also show that 15 of 16 sectors are overvalued, with 11 sectors overvalued by double-digit percentages. This makes investing more like trading technical momentum.

As stocks move to new highs they become overvalued fundamentally and overbought technically, and can trade above their risky levels. Many stocks and indices form parabolic upside patterns that become bubbles, and all bubbles eventually pop.

Apple can be viewed as the poster child for this pattern. When Apple was trading above $700 a share on Sept. 21, several Wall Street analysts raised their price target to $1,000. One headline posted on the Internet on Sept. 18 says, "Apple will cross $1,000 within 15 months." At ValuEngine our price target was just above $700 and the stock was downgraded to hold from buy at that time.

Even with a valuation warning, when you cannot confirm a market high based upon the technicals, you get higher highs as the bubbles continue to inflate.

On April 19 I wrote, Warning Flags Fly, But Stock Top Unconfirmed as the weekly chart profiles did not shift to negative. A week later on April 26 I wrote, Dow, S&P, Nasdaq Poised To Recapture March/April Highs and this week we have seen a continuation of higher highs.

On Thursday the major averages set new intra-day highs at; 15,144.83 Dow industrials, 1635.01 S&P 500, 3428.54 Nasdaq, 6417.38 Dow transports and 970.46 Russell 2000. Dow transports ended Thursday below Wednesday's low at 6341 setting up a potential key reversal given lower closes today and Monday.


Over the past several weeks I indicated that weekly closes above my semiannual pivot at 1566.9 on the S&P 500 would indicate upside potential to my semiannual pivot at 965.51 on the Russell 2000, which has been accomplished. A close today above 965.51 Russell 2000 indicates a potential continuation of the bubbles to my semiannual risky level at 3583 on the Nasdaq. If this occurs, the valuation warning will intensify particularly with the yield on the 30-Year Treasury above 3.00%.

A close today below 965.51 on the Russell 2000 indicates risk to my semiannual pivots at 1566.9 S&P 500 and 5955 Dow transports. Below is my semiannual value level at 14,323 on Dow industrials. These levels will be with us until the end of June.

My prediction remains that the major equity averages will test my annual value levels at some point in 2013 at: 12,696 Dow industrials, 1348.3 S&P 500, 2806 Nasdaq, 5469 Dow transports and 809.54 Russell 2000.

The Dow utilities mini bubble pops: The utility average set a multi-year high at 537.86 on April 30 between my quarterly pivot at 524.16 and my annual risky level at 540.37. This index still has the largest distribution of buy rated stocks so downside to my monthly value level at 509.53 should provide a buying opportunity. There are 63 strong buy rated stocks and 125 buy rated stock in this sector of 215 names, thus 87.4% of all utility stocks have buy ratings.

On April 30 I wrote, Homebuilder Downgrades Cloud Earnings and since then there has been five downgrades even as the PHLX Housing Sector Index (^HGX) set a new multi-year high at 205.95 on Thursday.

Beazer Homes ($20.17 vs. $16.38 on April 30): Has been downgraded to sell from hold and set a new 2013 high at $20.65 on May 9.

Hovnanian ($5.99 vs. $5.56 on April 30): Has been downgraded to hold from buy and tested $6.08 on May 7. This gave buy-and-trade investors the opportunity to sell at my semiannual risky level at $6.00.


Lennar ($42.40 vs. $41.42 on April 30): Has been downgraded to sell from hold and tested $43.62 on May 9.

MDC Holdings ($38.06 vs. $37.80 on April 30): Has been downgraded to sell from hold and tested $39.25 on May 2.

PulteGroup ($22.85 vs. $21.21 on April 30): Has been downgraded to sell from hold and set a new multi-year high at $23.95 on May 9.

On May 2 I wrote, Bull Market Will End Without Big-Bank Leadership where I showed that only Citigroup ($48.60 vs. $45.87 on May 2) has a buy rating. Investors should consider booking profits on this buy-and-trade strategy on strength to my monthly risky level at $51.61.


On May 8 I wrote, Record High Transports a Second Chance to Sell and each of the eight sell rated names traded sideways to up that day giving investors a second chance to take some nice gains on stocks rated "avoid-source of funds." This morning we show that 83.2% of all transportation stocks are rated sell or strong sell.

One of the Dow components I have been tracking Caterpillar ($89.95): Has been downgraded to sell from hold and traded up to $90.69 on Thursday vs. my monthly risky level at $90.84.

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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