Dow At New High With Two-Thirds Of Stocks Overvalued
The Dow Industrial Average followed the Dow Transportation Average to new all time closing highs last week and both set new closing highs on Friday reconfirming a Dow Theory Buy Signal. Dow Industrials ended the week at 14,397.07 above my semiannual risky level, now a pivot until the end of June at 14,323. Dow Transports ended the week at 6143.48 well above my semiannual pivot at 5955. The next upside target is tracking the S&P 500 to my semiannual risky level at 1566.9, which is shy of the all time intraday high at 1576.09 set in October 2007. While stocks rally, the yield on the U.S. Treasury 30-year bond rose to a 2013 high at 3.286% versus the 2012 high yield at 3.492% set about a year ago. Keep in mind that the stated objective of the Federal Reserve’s quantitative easing moves is to lower long term U.S. Treasury yields. This yield is at the highest level since QE3 was announced on Sept 13, 2012 and since QE4 was announced on Dec 12, 2012. These programs have the Fed buying $40 billion agency mortgage-backed securities a month, and $45 billion longer-maturity U.S. Treasuries a month, both with an unknown end date. Buying $85 billion a month has not been enough to push yields lower, but is instead creating a bubble in U.S. equities, with ValuEngine warning that 65.5% of all stocks are overvalued, which is just above the 65% threshold needed to issue such a warning. In addition, fifteen of sixteen sectors are overvalued, thirteen by double-digit percentages. Technically, the weekly chart profiles for the major averages remain extremely overbought with 12x3x3 weekly stochastic readings at 93.24 on Dow Industrials, 94.63 Dow Transports and 92.61 on the S&P 500. A stochastic reading above 80.00 is overbought on a scale of 00.00 to 100.00. Semiannual risky levels represent the best case highs under the assumption that nine years of price data are enough for a market to anticipate all possible bullish or bearish events in the first half of 2013. In the case of the major equity averages the semiannual levels are 14,323 Dow Industrials, 1566.9 S&P 500, 3583 NASDAQ, 5955 Dow Transports and 965.51 Russell 2000, therefore stocks are trading in its overall zone called a semiannual risky area. The downside risk in 2013 is to annual value levels at 12,696 Dow Industrials, 1348.3 S&P 500, 2806 NASDAQ, 5469 Dow Transports and 809.54 Russell 2000. Seven ETF’s traded to multi-year highs last week. Here’s the list featuring their semiannual risky levels and annual value levels: Industrial Select Sector SPDR Fund (XLI) ($41.82) has an annual value level at $35.87 with semiannual risky level at $42.03. The industrial products sector is 17.1% overvalued. Consumer Discretionary Sector SPDR Fund (XLY) ($52.62) has an annual value level at $37.23 with semiannual risky level at $53.38. The Consumer Discretionary sector is 13.4% overvalued. Consumer Staples Sector SPDR Fund (XLP) ($38.62) has an annual value level at $34.73 with a semiannual pivot at 36.70 and a weekly risky level at $39.46. The Consumer Staples sector is 23.5% overvalued. Keep in mind that the Conference Board’s reading on Consumer Confidence was 69.6 in February well below the neutral zone for this index at 90 to 110. iShares DJ US Consumer Services Sector Index Fund (IYC) ($96.11) has an annual value level at $72.01 with semiannual pivot at $95.48 and weekly risky level at $97.60. The Retail-Wholesale sector is 16.9% overvalued. Financial Select Sector SPDR Fund (XLF) ($18.24) has an annual value level at $10.80 with a semiannual pivot at $16.79 and weekly risky level at $18.32. The Finance sector is 18.6% overvalued. An additional warning for this sector is the fact that two of the four “too big to fail” banks were downgraded to hold from buy last week Health Care Select Sector SPDR Fund (XLV) ($44.54) has an annual value level at $37.39 with a semiannual pivot at $41.24 and weekly risky level at $45.19. The Medical sector is 10.4% overvalued. iShares DJ Transportation Avg (IYT) ($109.66) has an annual value level at $97.32 with a semiannual pivot at $106.96 and weekly risky level at $112.21. The Transportation sector is 20.5% overvalued.