NEW YORK (TheStreet) -- In May the major equity averages appeared to have peaked in the May 20/May 22 time frame. The problem then was that all five of the major equity averages were not in sync to confirm those highs. My conclusion was if you can't confirm the highs then new highs will follow.
Today we are in a similar situation with the Nasdaq setting new multi-year highs, while the other four remain shy of their August highs; 15,658.43 for the Dow Industrial Average set on Aug. 2, 1709.67 for the S&P 500 set on Aug. 2, 6686.86 Dow transportation average set on Aug. 1, and 1063.52 Russell 2000 set on Aug. 5.
The Nasdaq has the power to pull the other averages higher given a weekly close above my semiannual and monthly risky levels at 3759 and 3772 vs. Thursday's new multi-year high at 3731.84.
Fundamentally the stock market has been trading under a ValuEngine valuation warning at least since the May highs. Today we show that 76.7% of all stocks are overvalued 42.8% by 20% or more. Fifteen of 16 sectors are overvalued, 13 by double-digit percentages, of which 10 are overvalued by 20.7% to 32.4%. Sector price-to-earnings ratios have become elevated between readings of 17.4 to 31.0. This week I covered the housing market and banking system using data from the FDIC Quarterly Banking Profile for the second quarter. The PHLX Housing Sector Index (177.62) peaked at 210.01 on May 20 and strength this week failed below the 200-day simple moving average at 183.01. The housing index is up just 3.7% year to date and is 15.4% off its May high. The America's Community Bankers Index (209.29) peaked at 220.73 on July 24 and this index remains well below its 50-day simple moving average at 213.61. The community banking index is up a solid 22.6% year to date beating the 18% rise in the S&P 500, but since July 24 is down 5.2%, underperforming the S&P. The PHLX KN Banking Index (63.57) peaked at 67.11 on August 1 and this index also remains well below its 50-day simple moving average at 64.67. The regional banking index is up 24.0% year to date, but is down 5.3% since August 1.
Like I said in February 2007 when the banking index set its all-time high, 'you can't have a bull market in stocks with a bear market in financials'. The regional banking index includes the four 'too big to fail' banks and this week we learned that all four are significantly cutting back on the mortgage origination businesses, which is not good news for the housing market.
Later this month three stocks will vacate the Dow Industrial Average with three new members coming on board. Here are my buy-and-trade parameters for these stocks.
Alcoa (AA) ($8.16) is trading between its 50-day SMA at $8.01 and its 200-day SMA at $8.41. This hold rated stock leaves the Dow with fair value at $8.74 and a one-year price target at $7.81. My monthly value level is $7.78 with a semiannual risky level at $11.33.
Bank of America (BAC) ($14.48) is trading above its 50-day SMA at $14.33. This hold rated stock leaves the Dow with fair value at $13.23 and a one-year price target at $14.94. My semiannual value level is $10.09 with a monthly pivot at $14.26 and annual risky level at $17.07. Hewlett Packard (HPQ) ($21.96) is trading between its 200-day SMA at $20.93 and its 50-day SMA at $24.99. This buy rated stock leaves the Dow with fair value at $24.00 and one-year price target at $24.11. I do not have a value level with a semiannual risky level at $24.24. Goldman Sachs (GS) ($163.35) is above its 50-day SMA at $160.52. This hold rated stock enters the Dow with fair value at $129.82 and a one-year price target at $166.10. My semiannual value level is $123.16 with a monthly risky level at $177.43 and annual risky level at $186.86. Nike (NKE) ($68.08) traded to a new multi-year high at $68.90 on Thursday. This hold rated stock enters the Dow with fair value at $53.16 and a one-year price target at $68.72. I do not show value levels with a quarterly pivot at $68.02 and monthly risky level at $69.52. Visa (V) ($185.06) traded up to $187.81 on Thursday staying above the 50-day SMA at $182.84. The hold rated stock enters the Dow with fair value at $154.78 and a one-year price target at $185.89. My semiannual value level is $172.20 with monthly and quarterly pivots at $191.00 and $193.54.
At the time of publication the author held no positions in any of the stocks mentioned.
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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.
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