Major equity averages testing risky levels
The Fed-induced rally has resulted in an overvalued market fundamentally and an overbought market technically.
A risky asset class just got riskier as stock market fundamentals remain overvalued and as the technicals become more overbought.
This week the Dow Jones Industrial Average ($INDU) joined the Dow Transportation Average setting new all-time highs, and in the process confirmed a Dow Theory Buy.
Friday morning, www.ValuEngine.com issued a valuation watch as 63.3% of all stocks are overvalued. A valuation warning comes when 65% or more of all stocks are overvalued. We have had market hiccups following two warnings already this year. We still show 15 of 16 sectors overvalued, 11 by double digit percentages. The three most overvalued sectors are transportation (by 20.9%), construction (by 22.0%), and consumer staples (by 22.5%).
The major equity averages are even more overbought technically with 12x3x3 weekly slow stochastic readings at: 93.16 for the Dow Industrials, up from 91.42 last week; 92.59 for the S&P 500 ($INX), up from 91.30 last week; 88.95 on Nasdaq ($COMPX), up from 87.39 last week; 93.94 on Dow Transports, down slightly from 94.50 last week; and, 92.49 on the Russell 2000, up from 91.60 last week. Readings above 80.00 are overbought.
The Dow Industrial Average ended Thursday just above its semiannual risky level, now a pivot at 14,323 with another all time closing high at 14,329.49. The next risky levels to focus on are my semiannual risky level at 1566.9 on the S&P 500, and the semiannual risky level at 965.51 on the Russell 2000. I project that there will be additional weekly risky levels next week to limit this MOJO run for stocks.
Here is my weekly review of the key levels for the U.S. capital markets:
Yield on the 10-Year Treasury note (2.01%): My annual and semiannual value levels are 2.476% and 3.063% with my annual pivot at 1.981% and new monthly risky level at 1.796%. Note how my annual pivot remains a magnet. Beware that the 30-Year bond yield is approaching its 2013 high at 3.25%, which is the yield that would likely cause more than 65% of all stocks to be overvalued for another valuation warning.
Comex Gold ($1577.5): The December 2011 low is $1523.9 with my annual pivot at $1599.9 and semiannual, monthly, quarterly and annual risky levels at $1719.2, $1737.6, $1802.9 and $1852.1. Gold has become oversold on its weekly chart.
Nymex Crude Oil ($91.71): The 200-week SMA is $86.65 with the five-week MMA at $93.01 on a negative weekly chart profile. My quarterly pivot is $95.84 with monthly and annual risky levels at $98.23 and $115.23.
The euro vs the dollar (1.3125): The weekly chart profile is negative with the five-week MMA and 200-week SMA at 1.3215 and 1.3526. My semiannual value level is 1.2797 with monthly and annual pivots at 1.3249 and 1.3257 and quarterly pivot at 1.3334.
Dow Jones Industrial Average ($INDU) (14,329.49): Quarterly and annual value levels are 13,668 and 12,696 with monthly and semiannual pivots at 13,949 and 14,323. Thursday's high was a new all time intraday high at 14,354.69 versus this week's risky level at 14,387.
S&P 500 ($INX) (1544.26): Quarterly and annual value levels are 1431.1 and 1348.3 with a monthly pivot at 1528.6, and weekly and semiannual risky levels at 1547.7 and 1566.9, versus the October 2007 intraday high at 1576.09.
Nasdaq ($COMPX) (3232.09): Quarterly and annual value levels are 3071 and 2806 with a monthly pivot at 3197, a weekly pivot at 3226, and quarterly risky level at 3274.
Dow Transportation Average (6081.42): Monthly and annual value levels are 5522 and 5469 with annual and semiannual pivots at 5925 and 5955, and this week's risky level at 6192 versus the intraday all time high at 6188.58 set on Wednesday.
Russell 2000 (934.57): My annual value levels are 860.25 and 809.54 with a monthly pivot at 901.68 and weekly and semiannual risky levels at 936.95 and 965.51. This small cap index set a new all time intraday high at 934.57 on Thursday right on the day's close.
As I said last week, weekly closes above all monthly pivots at 13,949 Dow Industrials, 1528.6 S&P 500, 3197 NASDAQ, and 901.68 Russell 2000 indicates potential strength to the risky levels at 14,323 Dow Industrials, 1566.9 S&P 500 and 965.51 Russell 2000. With the Dow just above 14,323, its one down, two to go.
We need weekly closes below these monthly pivots to indicate risk to the monthly value level at 5522 Dow Transports. The other first value levels are 13,668 Dow Industrials, 1431.1 S&P 500, 3071 NASDAQ and 860.25 Russell 2000.
At the time of publication the author had no position in any of the stocks mentioned.
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