Homebuilder downgrades continue
Stocks are more overvalued and more overbought than a week ago but still without confirming a market top.
The major equity averages continued to set new all time highs this week, with the Nasdaq ($COMPX) setting a new multi-year high. Stock market strength is causing higher overbought technical momentum readings on weekly charts.
Higher stock prices and a higher 30-year Treasury bond yield intensified the ValuEngine valuation warning as 70.8% of all stocks were overvalued on Wednesday. Friday morning this reading slipped to 69.9% as the bond yield moved slightly lower. The bottom line is that stocks are more overvalued and more overbought than they were a week ago, but still without confirming a market top.
This continued market dynamic is similar to 1999/2000 when there were worries about how the clocks around the world would tick going into the first day of the new. Tech spending to prevent problems and an easy monetary policy by the Federal Reserve was fueling a parabolic bubble in the tech heavy Nasdaq. When the Nasdaq moved above 5000 in March 2000 I told investors to reduce holdings in Nasdaq stocks by 50% saying that the Nasdaq would decline to 3500 then 3000 before the end of the year.
Today the Nasdaq is back within the 3000 to 3500 cone of the March 2000 tech bubble, and this time it's the easy money policy of the Federal Reserve via QE3 and QE4. The upside for the Nasdaq is to my semiannual risky level at 3583, only 3.4% higher than Thursday's close. This week, some Fed officials suggested that this policy should be unwound.
This week's data included weaker than expected regional manufacturing. Industrial production was below expectations. On Thursday jobless claims were back above the 350,000 recessionary threshold, and housing starts were much weaker than expected. This suggests that the QEs are not working.
Here are some stock specific concerns as the equities bubbles inflate:
When Google (GOOG) ($903.87) popped above $900 on Wednesday and traded as high as $919.97 on Thursday pushing the stock above ValuEngine's one-year price target at $912.09. In my opinion additional strength is merely inflating a stock specific bubble. Google is 9.3% overvalued and my semiannual pivot is $854.04.
When Apple (AAPL) traded above $700 back on Sept. 21, it too traded slightly above the ValuEngine one-year price target and was downgraded to hold from buy. If you are trading Google consider using a stop loss to minimize a loss or lock in a gain.
A week ago I reiterated that Citigroup (C) ($50.61 vs. $48.60 on May 10) was the only buy rated money center or regional bank and that investors should consider booking profits on strength to my monthly risky level at $51.61. This week's high has been $51.45.
A week ago I also presented additional downgrades to homebuilder stocks and additional downgrades occurred this week.
On Wednesday the National Association of Home Builders' Housing Market Index (HMI) showed an uptick of three points to 44 in May, still below the neutral 50 reading. The NAHB noted increasing urgency among potential buyers of new homes given low inventory, low mortgage rates and improving local economies.
On Thursday housing starts for April came in at an annual rate 853,000, below the 973,000 consensus estimate, and down 16.5% from the pace of March. This news was partially offset by a strong gain in building permits, led by future production of multifamily housing.
The homebuilders are most concerned about single family starts, which fell by 2.1% to an annual rate of 610,000, just above the key 600,000 level. Factors holding back home construction are limited access to construction credit, tight qualification standards for mortgage borrowers, the rising costs of building materials, developable lots and finding suitable labor.
Beazer Homes (BZH) ($21.47 vs. $20.17 on May 10): Has been downgraded to "strong sell" from "sell" as the stock a new 2013 high at $22.63 on May 15.
DR Horton (DHI) ($26.80 vs. $26.82 on May 10): Has been downgraded to "strong sell" from "sell" as the stock a new 2013 high at $27.74 on May 15.
KB Home (KBH) ($23.88 vs. $24.16 on May 10): Has been downgraded to "sell" from hold as the stock set a new 2013 high at $25.14 on May 15.
PulteGroup (PHM) ($23.35 vs. $22.85 on May 10): Has been downgraded to "strong sell" from "sell" and set a new multi-year high at $24.47 on May 15.
Ryland Group (RYL) ($48.92 vs. $47.76 on May 10): Has been downgraded to "strong sell" from "sell" and set a new multi-year high at $50.05 on May 14.
Standard & Pacific (SPF) ($9.24 vs. $9.44 on May 10): Has been downgraded to "strong sell" from "sell" and set a new multi-year high at $9.97 on May 14.
Toll Brothers (TOL) ($36.13 vs. $36.34 on May 10): Has been downgraded to "sell" from "hold," but remains below its 2013 high at $38.36 set on Jan. 29. Toll Brothers reports quarterly results next Wednesday premarket and 7 cents a share is expected.
The construction sector is 19.9% overvalued and among the 159 stocks in the sector 69.2% are rated "sell" or "strong sell" giving the sector an "underweight" rating.
Investors should have 50% in cash, and allocations to U.S. equities should focus on the buy rated components of the Dow Jones Industrial Average, Dow utilities, and the "buy"-rated brand names in the retail-wholesale sector. On Monday and Tuesday I will be profiling 18 "buy"-rated stocks in the retail-wholesale sector pre-earnings.
As long as weekly closes are above my semiannual pivot at 965.51 on the Russell 2000 the upside is to my semiannual risky level at 3583 on the Nasdaq. My semiannual value level is 14,323 on the Dow Jones Industrial Average ($INDU) with semiannual pivots at 1566.9 on the S&P 500 ($INX) and 5955 on the Dow transportation average. I still project risk to my annual value levels at 12,696 Dow industrials, 1348.3 S&P 500, 2806 Nasdaq, 5469 Dow transports and 809.54 Russell 2000 at some point in 2013.
To confirm a market top we need to see negative weekly chart profiles. This would have all five major averages showing their 12x3x3 weekly slow stochastic readings declining below 80.00 on a scale of 00.00 to 100.00 with weekly closes below the five-week modified moving averages today at; 14,803 Dow Industrials, 1595.0 S&P 500, 3330 Nasdaq, 6217 Dow Transports and 950.68 Russell 2000.
At the time of publication the author held no positions in any of the stocks mentioned.
More from TheStreet.com
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
A new survey asks employees around the country to rank their company's culture and values. Many in the top 10 were, not surprisingly, in tech.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.