Markets flash warning signals

With the averages hitting new highs, many stocks are overvalued fundamentally and overbought technically.

By TheStreet Staff May 10, 2013 12:55PM

thestreet logoMale Stock trader copyright Flying Colours Ltd, Digital Vision, Getty ImagesBy Richard Suttmeier


This week all five major equity averages set a series of new all-time highs, or multi-year highs. As this occurred the pundits on financial TV called for S&P 1700 saying that stocks were still cheap. At ValuEngine we disagree.


Friday morning we show that 66.3% of all stocks are overvalued, where readings above 65% define a ValuEngine valuation warning, which typically occurs prior to a market top. Today we show that 26.6% of all stocks are overvalued by more than 20%. We also show that 15 of 16 sectors are overvalued, with 11 sectors overvalued by double-digit percentages. This makes investing more like trading technical momentum.


As stocks move to new highs they become overvalued fundamentally and overbought technically, and can trade above their risky levels. Many stocks and indices form parabolic upside patterns that become bubbles, and all bubbles eventually pop.


Apple (AAPL) can be viewed as the poster child for this pattern. When Apple was trading above $700 a share on Sept. 21, several Wall Street analysts raised their price target to $1,000. One headline posted on the Internet on Sept. 18 says, "Apple will cross $1,000 within 15 months." At ValuEngine our price target was just above $700 and the stock was downgraded to hold from buy at that time.

Even with a valuation warning, when you cannot confirm a market high based upon the technicals, you get higher highs as the bubbles continue to inflate.


On April 19 I wrote on that while warning flags were flying, a stock top could not yet be confirmed (TheStreet) as the weekly chart profiles did not shift to negative. A week later on April 26 I wrote on TheStreet, Dow, S&P, Nasdaq Poised To Recapture March/April Highs and this week we have seen a continuation of higher highs.


On Thursday the major averages set new intra-day highs at; 15,144.83 Dow Jones Industrial Average ($INDU), 1635.01 S&P 500 ($INX), 3428.54 Nasdaq ($COMPX), 6417.38 Dow transports and 970.46 Russell 2000. Dow transports ended Thursday below Wednesday's low at 6341 setting up a potential key reversal given lower closes today and Monday. 


Over the past several weeks I indicated that weekly closes above my semiannual pivot at 1566.9 on the S&P 500 would indicate upside potential to my semiannual pivot at 965.51 on the Russell 2000, which has been accomplished. A close today above 965.51 Russell 2000 indicates a potential continuation of the bubbles to my semiannual risky level at 3583 on the Nasdaq. If this occurs, the valuation warning will intensify particularly with the yield on the 30-Year Treasury above 3%.


A close today below 965.51 on the Russell 2000 indicates risk to my semiannual pivots at 1566.9 S&P 500 and 5955 Dow transports. Below is my semiannual value level at 14,323 on Dow industrials. These levels will be with us until the end of June.


My prediction remains that the major equity averages will test my annual value levels at some point in 2013 at: 12,696 Dow industrials, 1348.3 S&P 500, 2806 Nasdaq, 5469 Dow transports and 809.54 Russell 2000.


The Dow utilities mini bubble pops

The utility average set a multi-year high at 537.86 on April 30 between my quarterly pivot at 524.16 and my annual risky level at 540.37. This index still has the largest distribution of buy rated stocks so downside to my monthly value level at 509.53 should provide a buying opportunity. There are 63 strong buy rated stocks and 125 buy rated stock in this sector of 215 names, thus 87.4% of all utility stocks have buy ratings.


On April 30 I wrote on TheStreet, Homebuilder Downgrades Cloud Earnings, and since then there has been five downgrades even as the PHLX Housing Sector Index (^HGX) set a new multi-year high at 205.95 on Thursday.


Beazer Homes (BZH) ($20.17 vs. $16.38 on April 30): Has been downgraded to "sell" from "hold" and set a new 2013 high at $20.65 on May 9.


Hovnanian (HOV) ($5.99 vs. $5.56 on April 30): Has been downgraded to "hold" from "buy" and tested $6.08 on May 7. This gave buy-and-trade investors the opportunity to sell at my semiannual risky level at $6.00. 

Lennar (LEN) ($42.40 vs. $41.42 on April 30): Has been downgraded to "sell" from "hold" and tested $43.62 on May 9.


MDC Holdings (MDC) ($38.06 vs. $37.80 on April 30): Has been downgraded to "sell" from "hold" and tested $39.25 on May 2.


PulteGroup (PHM) ($22.85 vs. $21.21 on April 30): Has been downgraded to "sell" from "hold" and set a new multi-year high at $23.95 on May 9.


On May 2 I wrote a story showing (see TheStreet) that only Citigroup (C) ($48.60 vs. $45.87 on May 2) has a "buy" rating. Investors should consider booking profits on this buy-and-trade strategy on strength to my monthly risky level at $51.61. 


On May 8 I wrote on TheStreet, Record High Transports a Second Chance to Sell and each of the eight "sell"-rated names traded sideways to up that day, giving investors a second chance to take some nice gains on stocks rated "avoid-source of funds." Friday morning we show that 83.2% of all transportation stocks are rated "sell" or "strong sell."


One of the Dow components I have been tracking, Caterpillar (CAT) ($89.95), has been downgraded to "sell" from "hold" and traded up to $90.69 on Thursday vs. my monthly risky level at $90.84.


At the time of publication the author held no positions in any of the stocks mentioned.



More from

May 10, 2013 2:37PM
The media loves to cheerlead and shove this stupid, ridiculous dow number in our faces 24 hours a day because it's easy and they don't have the talent or energy to research and report any real news. Shut down the government supported stock markets now and send all these Wall street punks in ties to hit the bricks in search of a real job where they might actually produce something of value.  
May 10, 2013 2:23PM
So sick and tired of this market manipultion!! Makes me want to cash in everything and say the H with it!!! Greedy manipulator. 
May 10, 2013 2:08PM
This is the type of crappola that Day Traders thrive upon - has no significance to Investors. Irrelevant BS not worth the dignity of a review.
May 10, 2013 3:18PM
If you didn't learn your lesson the last time don't start crying when it crashes again.  It's your own fault.
May 10, 2013 2:13PM
The dollar appreciation will make company´s results much weaker in the next few quarters. Competitive QEs around the world is bringing a currency war that is offsetting the Fed´s money printing
May 10, 2013 4:15PM
When Uncle Sam stops pumping this market it's going to free fall! 
May 10, 2013 2:29PM
Day-traders prefer Markets that are mostly rising, not falling. The Markets have indeed been flashing warning signs. The Old Pros don't trust this Market, neither should you. Stock prices based on who can get away with printing the most, is a bad deal eventually for everyone. CEOs are dumping their stocks in droves, meanwhile, the sheep are the only ones buying.
May 10, 2013 2:32PM
This is exactly why I buy long term in established mutual funds with very long track records instead of trying to time the markets
May 10, 2013 3:55PM
For the 852nd time, QE trumps everything, including what's pointed out in this article.  QE trumps crappy jobs numbers.  It trumps crappy GDP results, crappy factory order data, crappy European economic news, crappy news out of Japan, crappy earnings forecasts, crappy consumer confidence, crappy retail sales numbers and crappy small business sentiment.  As long as the UE rate is above 6.5% and as long as CPI is less than 2.5%, we're going to get another $85 billion, month in and month out.  Learn to love it.  Ride the wave and keep adjusting those stop-loss points on a regular basis.
May 10, 2013 3:59PM
The "Warriors Of The Middle Class" are manipulating and trying to hide the train wreck we are racing head long into. Student loan debt is excluding so many from being able to purchase homes and the tax payer will be on the hook for trillions in delinquent student loan debt. We still aren't out of the woods with foreclosures, short sales, and the impact of unregulated derivatives. When the sh!t hits the fan they hope to have everyone disarmed and in line with the socialist agenda.
May 10, 2013 3:00PM

This article seems to be nothing more than an ad for their "ValuEngine"


Sure stocks could be overbought - that's pretty easy to say when we're at all time highs. Their calls on what is and isn't overvalued is only as good as their models... which could be just as wrong as the models the analysis used to give Apple a $1,000 price target.


I need something more here. WHY are things overvalued -  just because ValuEngine says so?

May 10, 2013 5:15PM
Well folks, I guess Barry had to change his depends and go to bed at the rest home.
May 10, 2013 3:19PM
No worries - Obamaville is too big to fail.
May 10, 2013 2:31PM

I say ignore this for general market movement, and look for early signs that the money being pumped in by the fed is finally making it's way to the consumer. Significantly increased demand in the domestic economy. These are the same things the Fed is looking for I would think. when they come inflation is going to follow, and QE will be retrenched. A question remains as to whether the Fed will try to anticipate inflation, or wait to actually see dubious upticks in CPI. Until those things happen expect the markte to keep holding its own or better as long as corporate earnings hold up to outlooks.


I majored in art-history, so this free advice is worth what it costs....

May 10, 2013 3:49PM
Do you really care?  Noone here invests, diddly.  It is just a fun-time for those that profess they do.  It it all BS and has been that way and will remain so. 
May 10, 2013 5:24PM

Boys and girls, you need to pay attention now.

let me share a pearl of wisdom or two with you.

We all have an investing style. Embrace it. It will be different and unique to you only.

Markets ultimately are like everything else. They rise.

Just pay attention and buy that which you know. Never try to be slick and time markets.

Making money in the market is merely a matter of using common sense and being patient.

Every stock I have ever bought has returned great dividends and appreciated better than

any other vehicle with which to invest.

Diversify your money a bit . That means cash, stocks, real estate. Gold or silver if you must.

Forget the hot tips. But do read everything you can find to keep yourself aware of what is happening to not only your investment vehicles, but other potential investments as well.

As for most all of the tips you receive, be thankful for them, but do not act on them.

The market may possibly decline temporarily, but will always rise in the long term.

Use that as your guide and you will flourish. I have.

May 10, 2013 5:46PM
Shawn...Before I leave,I really have to question how old you are? And are you still living at home??
May 10, 2013 5:42PM

Markets did fine today and did nicely for the week, at least we did....

I'm not sure what else to invest in at our age, so if there is a correction again...??

I will do the best I can and cover our azzes, then move on to the next level..

But I'm gonna sleep at nights...And not try CRAWLING that Wall of Worry.


Off to a Grad Party...Cheers.

May 10, 2013 4:58PM
The market has been "flashing" warning signs for years.  Due to massive cost cutting efforts, reductions in force, outsourcing and continued "free money" with no cost of capital (courtesy of the bozos running the FED), equity prices have blossomed.  Fundamentals left town long ago...
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