Risky Levels Loom as Stocks Are Overvalued, Overbought
On Jan. 2 I wrote, The Stock Market Is a Risky Asset Class in 2013 and explained that while some upside potential remained that the downside risk exceeds the upside potential. This scenario remains in play.
On Jan. 4 I presented my 10 Themes for the New Millennium Teen Years and periodically I will focus on these themes throughout the year. My first 5 themes cover the housing market and banking system and I will soon be able to digest the FDIC Quarterly Banking Profile for Q4 2012. I will provide my unique analysis of this important data soon after it becomes public.
On Jan. 25 I explained why the Market Hasn't Peaked yet based upon the possibility that the fundamentals can become even more overvalued and that the weekly charts for the major averages were not yet overbought.
On Feb. 4 my recommendation was to Book Profits in Overvalued Market as www.ValuEngine.com issued a ValuEngine Valuation Warning with more than 65% of all stocks overvalued. I also noted that the weekly charts for all major averages were not yet overbought, so this call indicated that there continued to be upside to risky levels.
Today we show that 64.2% of all stocks overvalued and that all major equity averages have overbought weekly chart profiles. All 16 sectors are overvalued with 11 sectors overvalued by double-digit percentages. The most overvalued sectors are transportation by 22.6%, industrial products by 21.3% and construction by 24.9%.
Since ValuEngine data comes from industry sources, why do most strategists both on the buy side and sell side say that the stock market is cheap? While price-to-earnings ratios may be below ranges of previous market tops for the S&P 500 , we have measures by sectors that are based upon data for more than 7,000 companies. For example, the trailing 12 months P/E are 38.8 for the computer and technology sector and 49.7 for the construction sector. At the opposite end of the spectrum the auto-tires-trucks sector has a P/E of 15.7.
Technically my measure of momentum is the "12x3x3 weekly slow stochastic" and readings above 80.00 indicate that the major equity averages are overbought at; 87.82 on Dow industrials, 90.20 on S&P 500, 87.55 Nasdaq, 82.95 on Nasdaq 100 Index, 94.10 Dow transports, 92.83 Russell 2000, and 90.23 on the Philly Semiconductor Index.
The next component of timing a market top is testing longer term risky levels from my proprietary analytics. This began with the Dow transportation average which ended Thursday at yet another new all-time closing high at 5947.70, between my annual pivot at 5925 and my semiannual risky level at 5955.