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In making a bearish call on the U.S. stock market, I base it on both fundamental and technical factors. The fundamentals show that stocks are overvalued and we have had three ValuEngine Valuation Warnings so far this year. The January warning was ignored by the market but so far stocks peaked with the warning issued on February 18 and re-iterated on March 3. During this period we have seen many days where all 16 sectors have been overvalued, with eight to 11 by double-digit percentages. Today 63.8% of all stocks are overvalued, and all 16 sectors are overvalued, 11 by double-digit percentages.
ValuEngine provides valuation, forecast, and ratings data for a universe of more than 5,500 stocks. When more than 65% of all stocks are calculated to be overvalued, we issue a ValuEngine Valuation Warning. We do this because in the past this level of overvaluation has often been correlated with market corrections and downturns. Conversely when more than 65% of all stocks are undervalued additional weakness provides buying opportunities. On March 5, 2009 the percentage of undervalued stocks reached 91%.
The technical factors ignore the daily charts as timing a cycle high requires confirmation from the weekly charts and having risky levels from my proprietary analytics to judge how high markets can go before they top out. Right now the major averages are stuck in want I call the "Libya Trading Ranges," which are the February 18 highs down to the February 24 lows. The weekly chart profiles are positive, but overbought for all major averages except Dow Transports. To confirm a cycle high, all major averages must have weekly closes below their five-week modified moving averages with weekly 12x3x3 weekly slow stochastic readings declining below 8.0 on a scale of zero to 10.0.
This dynamic is being delayed as the major equity averages straddle their 50-day simple moving averages. The Dow Industrial Average and S&P 500 have been above their 50-day since December 1. They're now at 11,967 Dow and 1298.81 S&P 500. The NASDAQ and NASDAQ 100 have tested their 50-day several times since February 23, six days for the NASDAQ with the 50-day now at 2742.35 and four days for the NASDAQ 100 with the 50-day now at 2314.18. The Russell 2000 tested and held its 50-day on February 22 and February 23 and today the 50-day is 802.42. The Philadelphia Semiconductor index tested and held its 50-day the past two days at 444.47 and has been above the 50-day since September 24. Dow Transports has been below its 50-day since February 22 and has been tested as resistance twice, and closed above 5111 yesterday. A weekly close above the five-week shifts Transports to neutral delaying the market top.
Key Levels for the Major Equity Averages
  • The Dow Industrial Average (12,214) Libya Trading Range: 11,983 to 12,391. My annual value level is 11,491 with daily, weekly and monthly risky levels at 12,249, 12,483 and 12,741. The five-week modified moving average has been tested in each of the past three weeks and this week the average is 12,060.
  • The S&P 500 (1321.8) Libya Trading Range: 1294 to 1344. My quarterly value level is 1262.5 with daily, weekly and monthly risky levels at 1331.2, 1350.3 and 1381.3. The five-week modified moving average has been tested in each of the past three weeks and this week the average is 1307.
  • The NASDAQ (2766) Libya Trading Range: 2706 to 2840. My monthly value level is 2629 with daily, weekly, quarterly and monthly risky levels at 2798, 2829, 2853 and 2926. The NASDAQ traded below its five-week modified moving average in each of the past three weeks without a weekly close below, and this week the average is 2755.
  • The NASDAQ 100 (2338) Libya Trading Range: 2285 to 2403. My monthly value level is 2250 with daily, weekly, quarterly, and monthly risky levels at 2370, 2398, 2438 and 2499. The NASDAQ 100 traded below its five-week modified moving average in each of the past three weeks without a weekly close below, and this week the average is 2327.
  • Dow Transports (5147) Libya Trading Range: 4918 to 5306. My quarterly value level is 4671 with weekly, daily and annual pivots at 5052, 5119 and 5179. The Transports closed below its five-week modified moving average in each of the two weeks with declining momentum, which is a negative weekly chart profile. A close above this week’s five-week at 5111 shifts the weekly chart to neutral.
  • The Russell 2000 (824.66) Libya Trading Range: 795 to 838. My quarterly value level is 765.50 with weekly, daily and monthly risky levels at 831.09, 835.56 and 850.79. The five-week modified moving average has been tested in each of the past three weeks and this week the average is 810.47.
  • The Philadelphia Semiconductor Index (447.94) Libya Trading Range: 439 to 474. My monthly value level is 402.46 with a monthly pivot at 453.89, daily and quarterly pivots at 458.32 and 465.93, and weekly risky level at 485.92. The five-week modified moving average has been tested in each of the past three weeks and this week the average is 450.51.
The trading strategy in this environment is what I have been calling "Buy and Trade," where you buy weakness to a value level and sell strength to a risky level. Here are the guidelines.
Buy and Trade Strategies for Long Positions
  • Value Level – The price at which you establish an additional long position on share price weakness. This is done on a GTC Limit Order to buy weakness to the Value Level.
  • Risky Level – The price at which you remove a single long position or reduce a multiple long position on share price strength. This is done on a GTC Limit Order to sell strength to the Risky Level.
Buy and Trade Strategies for Short Positions
  • Value Level – The price at which you remove a single short position or reduce a multiple short position on share price weakness. This is done on a GTC Limit Order to buy weakness to the Value Level.
  • Risky Level – The price at which you establish an addition short position on share price strength. This is done on a GTC Limit Order to sell strength to the Risky Level.
10-Year Note – (3.542) Weekly, annual, and semiannual value levels are 3.642, 3.796 and 4.268 with a daily pivot at 3.523, and monthly, annual, and semiannual risky levels at, 3.002, 2.690 and 2.441.
Comex Gold – ($1429.0) Weekly, annual, quarterly, semiannual and annual value levels are $1385.4, $1356.5, $1331.3, $1300.6 and $1187.2 with monthly and quarterly pivots at $1437.7 and $1441.7, and daily and semiannual risky levels at $1450.1 and $1452.6.
Nymex Crude Oil ($104.78) Weekly, monthly and semiannual value levels are $97.78, $96.43, and $87.52 with my annual pivots at $99.91 and $101.92, and semiannual, daily and quarterly risky levels are $107.14, $107.71 and $110.87.
The Euro – (1.3900) My quarterly value level is 1.3227 with a daily pivot at 1.3953, and weekly, semiannual and monthly risky levels at 1.4446, 1.4624 and 1.4637.
Daily Dow: (12,214)Annual, quarterly, semiannual, and semiannual value levels are 11,491, 11,395, 10,959, and 9,449 with daily, weekly, monthly and annual risky levels at 12,249, 12,484, 12,741 and 13,890.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: The Case for a Bear Market for Stocks