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Stocks are Cheap, but Downside Risks Persist

|Includes: DIA, GLD, QQQ, SPY, iShares 20+ Year Treasury Bond ETF (TLT)
Stocks are cheap because we’ve come off several quarters of improved trailing twelve month EPS and because the 30-Year bond yield is below 3.00 percent. In addition Wall Street may still be overly optimistic about twelve month forward EPS. While more than 90% of all stocks are undervalued according to ValuEngine only 18.5% are rated STRONG BUY or BUY. This makes stock selection a real challenge. This week ends a difficult month and quarter with the monthly charts for the major equity averages turning negative. This conundrum between positive fundamentals and negative technicals is a reason for caution and why I have been recommending an allocation of at least 50% in cash since February. In the ValuTrader model portfolio we have a 41.25% allocation to stocks with a 10.0% allocation to shorts in Diamonds (NYSEARCA:DIA), S&P 500 Sector SPDRs (NYSEARCA:SPY) and NASDAQ 100 Shares (NASDAQ:QQQ). Stocks are cheap enough to increase allocations to 50%, while keeping ETF shorts at 10% until Value Levels are tested.
 
10-Year Note – (1.839) Semiannual, annual, monthly and quarterly value levels are 2.414, 2.690, 2.715 and 3.053 with a daily pivot at 1.860, and semiannual and weekly risky levels at 1.672 and 1.369. My semiannual risky level at 1.672 was tested on Friday.
 
Courtesy of Thomson / Reuters
 
Comex Gold – ($1646.5) Semiannual and annual value levels are $1469.9 and $1,356.5 with quarterly, semiannual and monthly pivots at $1655.8, $1644.8 and $1702.3 and weekly risky level at $1915.0. The daily chart shows a double-top, the weekly chart is now negative and the monthly chart shows a parabolic bubble, which is popping.
 
Courtesy of Thomson / Reuters
 
Nymex Crude Oil ($80.19) My weekly value level at $73.58 with the 200-week simple moving average at $83.68, a daily pivot at $80.04, my annual risky levels at $99.91 and $101.92 and quarterly, semiannual and monthly risky levels at $102.40, $103.92 and $104.23.
 
 
Courtesy of Thomson / Reuters
 
The Euro – (1.3506) No value levels with daily, weekly and quarterly pivots at 1.3620, 1.3646 and 1.3728, the 200-week simple moving average at 1.4009, and semiannual and monthly risky levels at 1.4752 and 1.4872.
 
Courtesy of Thomson / Reuters
 
Weekly Dow - (10,771) My weekly value level is 10,101 with the 200-week and 120-month simple moving averages at 10,675 and 10,590, and daily, annual and monthly risky levels at 11,205, 11,491 and 12,779. Semiannual value levels are 9,635 and 8,468 with the 50-day and 200-day SMA death cross at 11,542 and 11,994.
 
Courtesy of Thomson / Reuters
 
S&P 500 (1136.4) Weekly and semiannual value levels are 1040.1, 981.3 and 855.7 with daily and annual risky levels at 1180.34 and 1210.7.
 
NASDAQ (2483) Annual, weekly, and semiannual value levels are 2335, 2221, 2199 and 2049 with daily and monthly risky levels at 2571 and 2827.
 
NASDAQ 100 (NDX) (2207) Weekly, semiannual and annual value levels are 1999.0, 1951, 1861 and 1723 with daily and monthly risky levels at 2292 and 2431.
 
Dow Transports (4219) Semiannual and weekly value levels are 3868 and 3686 with my semiannual pivot at 4335, a daily risky level at 4357, and annual and monthly risky levels at 5179 and 5190.
 
Russell 2000 (652.44) Weekly and semiannual value levels are 565.64, 577.47 and 530.04 with a daily risky level at 672.05, and annual and monthly risky levels at 784.16 and 825.19.
 
The SOX– (359.95) Weekly, annual and semiannual value levels at 317.42, 270.98, 258.97 and 204.67 with daily and monthly risky levels at 373.17 and 418.07.
 
Equity Fundamentals – Stocks are extremely undervalued.
  • 90.8% of all stocks are undervalued / 9.2% of all stocks are overvalued. Stocks are as cheap as they were In March 2009 when 91.1% of all stocks were undervalued. Stocks are cheaper given lower prices and lower 30-Year bond yield.
  • All sixteen sectors are undervalued by double-digit percentages, fifteen by 22.5% to 35.1%. Back in March 2009 the sectors were undervalued by 33% to 45%. – Check out and subscribe to www.ValuEngine.com.
  • Out of 5080 rated stocks only 18.5% are rated BUY or STRONG BUY.
 
VE Morning Briefing – If you want expanded analysis of the US Capital Markets including a Fearless Prediction of the Week and a Stock of the Day go to this link and sign up: http://www.valuengine.com/nl/mainnl?nl=D
 
ValuTrader Model Portfolio – If you want to learn how to “Buy and Trade” use this link and sign up: http://www.valuengine.com/nl/mainnl?nl=V
 
ETF Weekly – If you want my Value Levels and Risky Levels for 30 Electronically Traded Funds use this link and sign up: http://www.valuengine.com/nl/mainnl?nl=U
 
ValuEngine FDIC Evaluation Report – In this report I slice and dice the FDIC Quarterly Banking Profile. We publish a ValuEngine List of Problem Banks in this publication: http://www.valuengine.com/nl/mainnl?nl=C
 
Definition of MOJO – This is my term for technical momentum. I use what’s called “12x3x3 slow stochastic readings” from daily, weekly and monthly charts. The scale is zero to 10.0 where above 8.0 is overbought and below 2.0 is oversold.
 
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.
 
Richard Suttmeier
Chief Market Strategist
ValuEngine.com
(800) 381-5576
 
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Send your comments and questions to Rsuttmeier@Gmail.com. For more information on our products and services visit www.ValuEngine.com
 
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. 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 to http://www.valuengine.com/nl/mainnl to review sample issues and find out more about my research.
 
“I Hold No Positions in the Stocks I Cover.”