The Stock Market Is a Risky Asset Class in 2013
In attempting to characterize the investment climate since 2007 I studied some of the hidden meanings of "The Wizard of Oz" the story written by L. Frank Baum in 1900. We have all seen the movie version released on August 14, 1939. One interpretation is that Emerald City represented the Federal Reserve System . This means that Fed Chief Bernanke is the modern day Wizard of Oz.
When Bernanke coined the phrase "fiscal cliff" he did so to scare everyone, and to justify the smoke and mirrors of QE1 through QE4. However, when you look behind the curtain you find that Bernanke's monetary policy decisions created bubbles that eventually popped; first in housing, then the banking system, gold and crude oil. There is one bubble that continues thanks to the QE's and that's the stock market.
The Dow Industrial Average and S&P 500 set all-time highs in October 2007 followed by the great credit crunch and significant downside for stocks. In March 2009 stocks were extremely undervalued and key technical levels held, and the stock bubble began to re-inflate with the help of the QE's. Stocks peaked after QE3 was announced on Sept. 13, 2012, and today QE4 begins. Current monetary policy is now intended to give investors a sense of security to buy riskier assets. While I can't deny some upside potential, I believe that the stock market is a risky asset class in 2013 with downside risks exceeding the upside potential.
We begin 2013 with an overvalued stock market according to www.ValuEngine.com. We show that 51.8% of all stocks are undervalued with 48.2% overvalued. Fourteen of 16 sectors are overvalued, seven by double-digit percentages; construction by 20.4%, consumer staples by 15.8%, retail-wholesale by 14.1%, industrial production by 14.1%, finance by 12.0%, transportation by 11.0% and business services by 10.9%. The cheapest sector is oils-energy but is only undervalued by 1.9%.
Chart Courtesy of Thomson/Reuters
The monthly chart for the S&P 500 (1426.19) shown above ended 2012 positive but overbought with the QE3 high at 1474.51 set on Sept. 14 and the October 2007 high at 1576.09. My monthly and annual value levels are 1397.6 and 1348.3 with an annual pivot at 1400.7 and a quarterly pivot at 1431.1. My semiannual value level lags at 1073.9 with my semiannual risky level at 1566.9, which is just below the October 2007 high at 1576.09.