Book Profits in Overvalued Market

Tickers in this article: DHI GS LOW MAS MHK MLI PHM RYL TXI
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.

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.

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