Stocks begin 2014 in growing bubbles
The major equity averages show bubble characteristics with overvalued fundamentals, overbought weekly technicals and a spaghetti bowl of value levels.
By Richard Suttmeier
NEW YORK (TheStreet) -- The stock market begins 2014 as an inflating bubble in a setup that reminds me of the market dynamics at the end of 1999. With the Nasdaq at 4069 on Dec. 31, 1999, I said, 'I don't know how high the Nasdaq can go in 2000, but it will drop into the 3500 to 3000 range at some point during the year.'
The stock market begins 2014 with 86.4 percent of all stocks overvalued and with 61.2 percent overvalued by 20 percent or more. The five major equity averages have positive but overbought weekly chart profiles. My proprietary analytics begin the year with tangled bowl of spaghetti of monthly, quarterly, semiannual and annual value levels, pivots and risky levels. It seems like the stock market bubble can inflate further, but that there's significant downside risk to annual value levels when the bubbles pops. In this environment I am providing my buy-and-trade parameters for the SPDR Dow Jones Industrial Average (DIA), the Nasdaq 100 Shares (QQQ) and the S&P 500 SPDRS (SPY).
Three of the five major equity averages ended 2013 setting new all-time intra-day highs at 16,588.25 on the Dow Industrial Average, 1849.44 the S&P 500 and 7410.25 the Dow transportation average. The Nasdaq set a new multi-year intra-day high at 4177.73. The Russell 2000 set its all-time intra-day high at 1167.96 on Dec. 26.
Last year was the first year of the past 20 years where the major equity averages did not test their 200-day simple moving averages with just two exceptions. The Nasdaq stayed above its 200-day all year in 1999 and Dow transports did the same in 1997. Over the last 20 years there have not been two consecutive years where the 200-day SMAs were not tested. My prediction for 2014 is that the major equity averages will their 200-day SMAs as a reversion to the mean. The 200-day SMAs begin 2014 at; 15,294 Dow Industrials, 1679.3 S&P 500, 3639 Nasdaq, 6564 Dow transports and 1034.53 Russell 2000.
The Dow Industrial Average (16,577) has a 12x3x3 weekly slow stochastic reading of 91.21, well above the 80.00 overbought reading. The Dow is well above its five-week modified moving average at 16,111 and its 200-week SMA at 12,780. New monthly, semiannual and annual value levels are 16,327, 16,245, 14,835 and 13,467 with quarterly and semiannual risky levels at 16,761 and 16,860. The upside to 16,860 is only 1.7 percent while the downside risk to 13,467 is 18.8 percent.
The S&P 500 -- (1848.4) has an overbought weekly stochastic reading of 93.89 and is above its five-week MMA at 1805.31 with its 200-week SMA at 1372.2. New semiannual and annual value levels are 1797.3, 1764.4, 1539.1 and 1442.1 with a monthly pivot at 1847.0, and quarterly risky level at 1896.0. The upside to 1896.0 is 2.6 percent while the downside risk to 1442.1 is 22 percent.
The Nasdaq -- (4177) has an overbought weekly stochastic reading of 95.09 and is above its five-week MMA at 4055 with its 200-week SMA at 2920. New semiannual and annual value levels are 3930, 3920, 3471 and 3063 with monthly and quarterly risky levels at 4267 and 4274. The upside to 4274 is 2.3 percent while the downside risk to 3063 is 26.7 percent.
The Dow transportation average -- (7401) has an overbought weekly stochastic reading of 92.76 and is above its five-week MMA at 7201 with its 200-week SMA at 5319. New quarterly and annual value levels are 7086, 6249 and 5935 with semiannual, monthly and weekly pivots at 7245, 7376, 7327 and 7383. I do not show a risky level but the downside risk to 5935 is 19.8 percent.
Russell 2000 -- (1163.64) has an overbought weekly stochastic reading of 89.76 and is above its five-week MMA at 1134.27 and its 200-week SMA at 825.53. New semiannual and annual value levels are 1133.29, 1130.79, 966.72 and 879.39 with quarterly and monthly risky levels at 1180.35 and 1200.55. The upside to 1200.55 is 3.2 percent while the downside risk to 879.39 is 24.4 percent.
The key to the upside for the major equity averages are weekly closes above all risky levels as such would indicate further inflation of the parabolic bubbles. With no additional risky levels you don't know how high the averages can go before the bubbles pops.
Warning flags would wave on weekly closes below the pivots at 1847.0 on the S&P 500 and 7245 on Dow transports.
Here are my buy-and-trade levels for the three important market ETFs:
SPDR Dow Jones Industrial Average ($165.47) has annual value levels at $148.05 and $134.45 with semiannual and monthly pivots at $162.05 and $163.22 and quarterly and semiannual risky levels at $167.19 and $167.82.
Nasdaq 100 Shares ($87.96) has annual value levels at $75.42 and $65.34 with semiannual pivots at $84.58 and $84.59 and monthly and quarterly risky levels at $89.08 and $90.93.
S&P SPDRs Fund ($184.69) has semiannual and annual value levels at $179.50, $176.28, $153.89 and $144.14 with a monthly pivot at $184.92 and quarterly risky level at $189.55.
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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