Unrest in Egypt could turn out to be the catalyst for triggering a long overdue global stock market correction. I saw some negative factors beginning over the past couple of weeks, most notably the ValuEngine Valuation Warning and the negative divergences away from the Dow Industrial Average, as all major averages are still overbought on their weekly charts.
In discussing the US Capital Markets, we know that the yield on the US Treasury 10-Year note is still in the trading range set in December between 3.568 and 3.247 with Friday’s close at 3.329 closer to the low end, as Egypt could be the catalyst for a flight to quality that will compete with the Federal Reserve’s continued QE2 purchases. A weekly close richer than 3.247 signals a US bond rally.
Comex gold traded as low as $1307.7 versus my semiannual value level at $1300.6, then rallied Friday to close at $1335.0 on a flight to safety in reaction to the unrest in Egypt. Gold is now positioned between my quarterly pivot at $1331.3 and my annual pivot at $1356.5. A weekly close above $1356.5 targets the range of my quarterly and semiannual risky levels at $1441.72 and $1452.6.
Nymex crude oil rebounded from $85.11 to $89.38 at Friday’s close, as my semiannual pivot proved to be a strong magnet. If oil stops being shipped through the Suez Canal, the price of oil could spike towards my annual risky levels at $99.91 and $101.92, particularly if the unrest spreads to other Arab countries. Shipping vessels may have to take the journey around the Cape of Good Hope at the tip of Africa. A way to play this possibility is Overseas Shipholding Group Inc (NYSE:OSG), which rallied $1.95 on Friday to $34.40.
Overseas Shipholding (OSG) is a member of the ValuTrader model portfolio entering at $32.55 on January 24th on a ValuEngine upgrade to BUY from HOLD. The stock has a fair value at $47.63 and a one-year price target at $36.34, which makes a good “Buy and Trade” candidate. The stock remains oversold on its daily chart. My quarterly value level is $28.88 with a weekly pivot at $34.76 and semiannual risky level at $46.66.
Overseas Shipholding Group (OSG) and its subsidiaries constitute a major international shipping enterprise owning and operating a diversified fleet of oceangoing bulk cargo vessels -- principally tankers. The company ranks among the world's largest owners of tankers both in terms of the number of vessels and in carrying capacity. The company charters its ships to commercial shippers and U.S. and foreign governmental agencies for the carriage of bulk commodities, primarily crude oil, petroleum products, grain, coal and iron ore.
The euro gave up some gains versus the dollar in reaction to the unrest in Egypt, but remains well above my quarterly pivot at 1.3227 with that chart resistance at 1.3786.
Stocks remain overvalued fundamentally according to ValuEngine with 15 of 16 sectors overvalued and only 40.2% of all stocks undervalued. On December 19th we had a ValuEngine Valuation Warning with 33.3% of all stocks undervalued, below the important 35% threshold, and all 16 sectors were overvalued.
All major averages remain overbought on their weekly charts and my Proprietary Analytics show weekly risky levels at 11,959 on the Dow Industrial Average after a high of 12,020.52 last week. My nearest value level is my annual pivot at 11,491.
- The S&P 500 has a weekly risky level at 1308.5 after a high of 1302.67 last week.
- The NASDAQ has a weekly risky level at 2769 after a high of 2766.17 two weeks ago.
- The Dow Transports has weekly and annual risky levels at 5104 and 5179 after testing 5256.80 two weeks ago.
- The Russell 2000 is below an annual pivot at 784.16 and a weekly risky level at 809.88 after testing 807.89 three weeks ago.
- Supporting my bearish call are negative divergences on the daily charts for S&P 500, NASDAQ, Transports and Russell 2000.
- A close on the Dow Industrial Average today below the 21-day simple moving average at 11,776 shifts the daily chart to negative.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.