Higher stock prices and a higher 30-year Treasury bond yield intensified the ValuEngine valuation warning as 70.8% of all stocks were overvalued on Wednesday. This morning this reading slipped to 69.9% as the bond yield moved slightly lower. The bottom line is that stocks are more overvalued and more overbought than they were a week ago, but still without confirming a market top.
This continued market dynamic is similar to 1999/2000 when there were worries about how the clocks around the world would tick going into the first day of the new. Tech spending to prevent problems and an easy monetary policy by the Federal Reserve was fueling a parabolic bubble in the tech heavy Nasdaq. When the Nasdaq moved above 5000 in March 2000 I told investors to reduce holdings in Nasdaq stocks by 50% saying that the Nasdaq would decline to 3500 then 3000 before the end of the year.
Today the Nasdaq is back within the 3000 to 3500 cone of the March 2000 tech bubble, and this time it's the easy money policy of the Federal Reserve via QE3 and QE4. The upside for the Nasdaq is to my semiannual risky level at 3583, only 3.4% higher than Thursday's close. This week, some Fed officials suggested that this policy should be unwound.
This week's data included weaker than expected regional manufacturing. Industrial production was below expectations. On Thursday jobless claims were back above the 350,000 recessionary threshold, and housing starts were much weaker than expected. This suggests that the QEs are not working.
Here are some stock specific concerns as the equities bubbles inflate:
A week ago I reiterated that Citigroup
A week ago I also presented additional downgrades to homebuilder stocks and additional downgrades occurred this week.
On Wednesday the National Association of Home Builders' Housing Market Index (HMI) showed an uptick of three points to 44 in May, still below the neutral 50 reading. The NAHB noted increasing urgency among potential buyers of new homes given low inventory, low mortgage rates and improving local economies.
On Thursday housing starts for April came in at an annual rate 853,000, below the 973,000 consensus estimate, and down 16.5% from the pace of March. This news was partially offset by a strong gain in building permits, led by future production of multifamily housing.
The homebuilders are most concerned about single family starts, which fell by 2.1% to an annual rate of 610,000, just above the key 600,000 level. Factors holding back home construction are limited access to construction credit, tight qualification standards for mortgage borrowers, the rising costs of building materials, developable lots and finding suitable labor.
Standard & Pacific
The construction sector is 19.9% overvalued and among the 159 stocks in the sector 69.2% are rated sell or strong sell giving the sector an underweight rating.
My Asset Allocation Suggestion
Investors should have 50% in cash, and allocations to U.S. equities should focus on the buy rated components of the Dow Jones Industrial Average, Dow utilities, and the buy rated brand names in the retail-wholesale sector. On Monday and Tuesday I will be profiling 18 buy rated stocks in the retail-wholesale sector pre-earnings.
Key Numbers for the Major Equity Averages
As long as weekly closes are above my semiannual pivot at 965.51 on the Russell 2000 the upside is to my semiannual risky level at 3583 on the Nasdaq. My semiannual value level is 14,323 on the Dow Jones Industrial Average with semiannual pivots at 1566.9 on the S&P 500 and 5955 on the Dow transportation average. I still project risk to my annual value levels at 12,696 Dow industrials, 1348.3 S&P 500, 2806 Nasdaq, 5469 Dow transports and 809.54 Russell 2000 at some point in 2013.
To confirm a market top we need to see negative weekly chart profiles. This would have all five major averages showing their 12x3x3 weekly slow stochastic readings declining below 80.00 on a scale of 00.00 to 100.00 with weekly closes below the five-week modified moving averages today at; 14,803 Dow Industrials, 1595.0 S&P 500, 3330 Nasdaq, 6217 Dow Transports and 950.68 Russell 2000.
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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