NEW YORK (TheStreet) -- The teenage years of the new millennium will be difficult for investors, businesses, Wall Street, Main Street, retirees, the health care network, the housing market and the banking system. We will be in a prolonged period where Americans will have to adjust to a lower standard of living. Stocks are overvalued making stock picking an important art to learn.
On Wednesday I wrote, The Stock Market Is a Risky Asset Class in 2013 even though I knew that the new year would begin with a strong rally for stocks. Strength has made stocks even less attractive fundamentally particularly with the yield on the U.S. Treasury 30-year bond up to 3.15% this morning.
In this environment I continue to believe in a buy-and-trade investment strategy and on Thursday I wrote, Polishing Apple's Profile for 2013. This story illustrates my method of stock picking.
Next week we add the fourth quarter earnings season to the mix and on Monday I will profile five stocks that report quarterly results during the week. During earnings season I will also keep track of the stocks that miss estimates or lower guidance in a stock feature I call "Woodshed Stocks." I will provide value levels at which to buy these stocks on weakness as long as they maintain buy ratings according to www.ValuEngine.com.
For the stock market the fundamentals are not cheap. At ValuEngine we show that 44.2% of all stocks are undervalued with 55.8% overvalued. This morning all 16 sectors are overvalued as shown in the table below. Note that 11 sectors have elevated price-to-earnings ratios of between 20.23 and 49.09.
Ten Themes for the teenage years of the New Millennium:
- The Housing Recovery will remain sluggish in 2013. The National Association of Home Builders Housing Market Index will have a tough time sustaining a trend above the neutral 50 reading. Single family housing starts will be stuck around an annual rate of 600,000 units. Existing home sales may average five million or so, but there is a backlog of other real estate owned in the banking system, and at Fannie Mae and Freddie Mac.
From the minutes of the Dec. 11 FOMC meeting: "Conditions in the housing market continued to improve gradually, but construction activity was still at a low level, restrained by the considerable inventory of foreclosed and distressed homes and the tight credit standards for mortgages." "Starts and permits of new single-family homes were essentially flat in October after rising significantly in the preceding month."
- The rebound in home prices will slow. As measured by the Case-Shiller 20-City Index home prices could decline in 2013 on a year over year basis. This index is up 9% since bottoming in March 2012, which puts pressure on affordability.
- The upside for money center and regional bank stocks will be limited in 2013. The bigger banks including those considered "too big to fail" will need additional capital to comply with Basil 3 capital and liquidity standards, Federal Reserve stress tests, and increasing assessments to fund the FDIC deposit insurance fund. Banks will also have to comply with still-to-be-determined Dodd-Frank rules.
From the Minutes of the Dec. 11 FOMC: "The share of existing mortgages that were seriously delinquent fell in the third quarter but remained elevated."
- Community Banks will continue to fail. The FDIC list of problem banks fell to 694 in the third quarter of 2012 and bank failures fell to 51 for the year. I predict that at least 35 banks will fail in 2013 bringing the total since the end of 2007 to 500 failed FDIC-insured financial institutions.
From the Minutes of the Dec. 11 FOMC: "Financial conditions in the commercial real estate sector were still generally strained amid elevated vacancy and delinquency rates."
- Consumer Confidence will remain below neutral. The December 2012 reading for the Conference Board's reading on consumer confidence came in at 65.1, which is well below the 90 to 110 neutral range, and confidence should remain below neutral for all of 2013.
- The low yield environment for the 10-Year Treasury note will continue. (1.956%) The rise in yield over the first few days of 2013 should hold my annual value level at 1.981%. My annual and semiannual value levels are 2.476% and 3.063% with my semiannual risky level at 1.413%.
- The bubble in Comex Gold will not re-inflate. ($1,631.0) My annual value level is $1,599.9 with a monthly pivot at $1.673.8 and semiannual, quarterly and annual risky levels at $1.719.2, $1.802.9 and $1.852.1.
- The bubble in Nymex Crude Oil will not re-inflate. ($91.69) My monthly value level lags at $74.23 with a quarterly risky level at $95.84 and annual risky levels at $115.23 and $115.42.
- The euro vs the dollar will maintain a trading range. (1.3051) My semiannual value level is 1.2797 with an annual pivot at 1.3257 and quarterly risky level at 1.3346. The June 2010 low is 1.1880 with the May 2011 high at 1.4941.
- The stock market is a risky asset class in 2013. Below are the key levels for the major equity averages.
Analysis of the Dow Industrial Average (12,938): Annual value levels are 12,696 and 12,509 with quarterly risky levels at 13,668 and 14,118. My semiannual value level is 10,788 with semiannual risky level at 14,323 versus the all time closing high at 14,164.54 set on Oct 9, 2007.
Analysis of the S&P 500 (1459.4): My annual value level is 1348.3 with annual and quarterly pivots at 1400.7 and 1431.1 and quarterly risky level at 1510.0. My semiannual value level is 1073.9 with semiannual risky level at 1566.9 versus the October 2007 high at 1576.09.
Analysis of the Nasdaq (3101): Annual value levels are 2806 and 2790 with a quarterly pivot at 3071 and quarterly risky level at 3274. My semiannual value level is 2546 with semiannual risky level at 3583.
Analysis of the Nasdaq 100 (2732): Annual value levels are 2463 and 2385 with quarterly risky levels at 2798 and 2920. My semiannual value level is 2249 with semiannual risky level at 3196.
Analysis of the Dow Transportation Average (5470): My quarterly value level is 5094 with an annual pivot at 5469 with a quarterly risky level at 5634. My semiannual value level is 4151 with annual and semiannual risky levels at 5925 and 5955. The all-time closing high is 5618.25 set on July 7, 2011.
Analysis of the Russell 2000 (872.60): Set a new all-time high at 878.43 on Thursday. Quarterly and annual value levels are 821.01 and 809.54 with an annual pivot at 860.25 and quarterly risky level at 913.92. My semiannual value level is 697.55 with semiannual risky level at 965.51.
Analysis of the PHLX Semiconductor Sector Index SOXX (397.54): Quarterly and annual value levels are 371.62 and 338.03 with quarterly risky level at 440.36. My semiannual value level is 325.99 with semiannual risky level at 520.17. A lower annual value level is 274.16.
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.