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Stock Market Resiliency Being Put to a Test

|Includes: DIA, DUG, EEM, FXI, GLD, iShares 20+ Year Treasury Bond ETF (TLT)
The test of resiliency for stocks comes from the dynamics for the US Capital Markets, both fundamentally and technically. The yield on the 10-Year US Treasury note has held my annual value level at 3.791, and these high yields are a drag on equity valuations. Comex gold has been volatile but seems to find a home at my annual pivot at $1356.5. Nymex crude oil trades on both sides of my semiannual pivot at $87.52. In this environment US stocks have become overvalued fundamentally and overbought technically. Stocks have been trading under a ValuEngine Valuation Warning for the past three days as the major averages push the envelope of new multi-year highs.
I still see the Warning Flags flying from Egypt, Europe and the emerging markets which are laggards as we approach mid-February. While the Dow Industrial Average is up 5.6% year to date the iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM) is down 5.4%, and the iShares FTSE China 25 Index Fund (NYSEARCA:FXI) is down 4.0% and is below both its 50-day simple moving average at $43.28 and its 200-day simple moving average at $42.13. These types of negative divergences suggest to me that US stocks are vulnerable once their Fed-induced bubbles pop.
Thursday’s equity closes were above all of this week’s pivots at 12,142 Dow Industrial Average, 1316.2 S&P 500, 2770 NASDAQ, 5077 Dow Transports, and 800.13 Russell 2000. The S&P 500 tested and held its weekly pivot at 1316.2. The Dow Transport Average out-performed on Thursday and tested its annual pivot at 5179.
  • The Dow Industrial Average (12,229) – My monthly value level is 11,759 with daily and annual risky levels at 12,404 and 13,890.
  • The S&P 500 (1321.9) – My quarterly value level is 1262.5 with today’s risky level at 1344.5.
  • The NASDAQ (2790) – My monthly value level is 2611 with daily and quarterly risky levels at 2850 and 2853.
  • Dow Transports (5168) My monthly value level is 4962 with daily and annual pivots at 5162 and 5179. Transports lag its January 18th high at 5256.80.
  • The Russell 2000 (812.70) My annual and quarterly value levels are 784.16 and 765.50 with a daily risky level at 829.97.
We are trading under a ValuEngine Valuation Warning - 16 of 16 sectors overvalued with only 33.15% of all stocks undervalued on Wednesday, below the 35% threshold by this measure. This also means that 66.86% of all stocks are overvalued. Why does Wall Street think stocks are cheap?
The US Treasury 10-Year Yield – (3.702)My annual value level is 3.791 with a weekly risky level at 3.525.
Comex gold – ($1361.7) My quarterly and annual pivots are $1331.3 and $1356.5 with daily, monthly, quarterly and semiannual risky levels are $1375.2, $1412.4, $1441.7, and $1452.6.
Nymex crude oil – ($87.14) My semiannual pivot at $87.52 has become a magnet with a monthly pivot at $91.83.
The euro – (1.3593) My quarterly value level is 1.3227 with my monthly risky level at 1.4225.  
Foreclosure Lull As Repossessions Rise Again
Foreclosure paperwork issues have slowed the home foreclosure process over the past two months, but as this dilemma works it way to a solution, foreclosures will rise again, as will bank auctions of OREO, Other Real Estate Owned. As a result more home owners who are missing mortgage payments are staying in their homes longer adding to the backlog of bad loans. Meanwhile, banks are picking up the pace in repossessions taking back 78,133 properties in January according to RealtyTrac. This is up 12% from December. Banks took back more than a million homes in 2010, and about five million borrowers are at least two months behind on mortgage payments.
The housing problems remain the same: high unemployment, a weak housing market, falling home prices and tighter lending standards.
That’s today’s Four in Four. Have a great day.
Richard Suttmeier
Chief Market Strategist, (800) 381-5576
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As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website I have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the ValuTrader Model Portfolio newsletter. You can go HERE to review sample issues and find out more about my research.
“I Hold No Positions in the Stocks I Cover.”