August Begins With New Highs and New Risky Levels

NEW YORK (TheStreet) -- July ended with a new all-time high for the Dow Industrial Average at 15,634.32 and with a new multi-year high on the Nasdaq at 3649.35. QE-induced bubbles continue to inflate the stock market and many individual stocks. The ValuEngine valuation warning continues with 76% of all stocks overvalued and with 43.5% overvalued by 20% or more. On the technical side, the weekly charts for the major averages are becoming overbought once again led by the Nasdaq and Russell 2000.

Fed Chairman Bernanke's policy experiment with a 0% federal funds rate and continuing quantitative easing has created a zombie economy. Savers have no discretionary dollars to spend, consumers are taxed with high gasoline prices, the housing bubble is re-inflating, and banks are raising rates on credit cards, small business loans and mortgages. I discussed this in detail on July 31 in Fed Policy Hurts Main Street, Creates Bubble Stocks. I say raise the funds rate to 3% and stop the QE madness!

We begin August with quarterly value levels at 14,288 Dow industrials, 1525.6 S&P 500, 3284 Nasdaq, 5348 Dow transports and 863.05 on the Russell 2000 with monthly and semiannual risky levels at 16,188 and 16,490 Dow industrials, 1742.5 and 1743.5 S&P 500, 3663 and 3759 Nasdaq, 7087 and 7104 Dow transports and 1092.24 and 1089.42 Russell 2000. My annual value levels lag at 12,696 Dow industrials, 1348.3 S&P 500, 2806 Nasdaq and 809.54 Russell 2000.

Here's a risk / reward for the major equity averages for the next five months:

When you look at this table, I show the upside percentage to semiannual risky levels and the downside risk to the semiannual value levels.

Here are my asset allocation ratings for the 16 sectors at ValuEngine:

Aerospace: Downgraded to avoid-source of funds from underweight (78 stocks). Only five stocks have buy ratings and 57 stocks or 73.1% are rated strong sell or sell.

Auto-Tires-Trucks: Underweight (95 stocks). Only two stocks have buy ratings and 32 stocks or 33.6% are rated strong sell or sell.

Basic Materials: Underweight (411 stocks). Only 11 have buy ratings and 235 stocks or 57.2% are rated strong sell or sell.

Business Services: Downgraded to underweight from overweight (248 stocks). 47 stocks or 19.0% have buy ratings and 26 are rated sell.

Computer & Technology: Overweight (1179 stocks). 499 stocks or 42.3% have buy ratings and 37 are rated sell. There are four buy rated Dow components in this sector.

Construction Underweight (162 stocks). Only five stocks have buy ratings and 90 stocks or 55.6% are rated strong sell or sell.

Consumer Discretionary: Equal-weight (426 stocks). Only 15 stocks have buy ratings and only 20 stocks have sell ratings.

Consumer Staples: Overweight (269 stocks). 129 stocks or 48.0% have buy ratings and only six have sell ratings. There are two buy rated Dow components in this sector.

Finance: Equal-weight (3132 stocks). 88 stocks have buy ratings and 57 are rated sell.

Industrial Products: Underweight (360 stocks). Only 42 stocks have buy ratings and 159, or 44.2% are rated strong sell or sell.

Medical: Equal-weight (816 stocks). 97 stocks have buy ratings and 174 are rated sell.

Multi-Sector Conglomerates: Overweight (49 stocks). 37 stocks or 75.5% have buy ratings and none have sell ratings. There are three buy rated Dow components in this sector.

Oils-Energy: Underweight (557 stocks). Only ten stocks have buy ratings and 175, or 31.4% are rated strong sell or sell.

Retail-Wholesale: Overweight (357 stocks). 285 stocks or 79.8% have buy ratings and only 10 have sell ratings. There are three buy rated Dow components in this sector.

Transportation: Avoid source of funds (181 stocks). Only eight have buy ratings and 142, or 78.5% are rated strong sell or sell.

Utilities: Overweight (215 stocks). 59 have strong buy ratings and 133 have buy ratings, thus 192 or 89.3% are buy rated. There are two buy rated Dow components in this sector.

Here are my buy-and-trade parameters for the 14 buy-rated Dow components:

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

General Electric ($24.37) set a multi-year high at $24.95 on July 19. My quarterly value level is $22.75 with a monthly pivot at $24.90 and a semiannual risky level at $26.68.

Home Depot ($79.03) set a multi-year high at $81.56 on May 22. My semiannual value level is $74.11 with a weekly pivot at $77.52 and monthly risky level at $80.39.

Hewlett Packard ($25.68) set a multi-year high at $26.71 on July 10. My semiannual value level is $24.24 with a semiannual risky level at $29.89.

IBM ($195.04) set a multi-year high at $215.86 on March 14 then set a low of $187.68 on April 22. My weekly value level is $185.39 with a monthly risky level at $210.04.

Intel Corp ($23.33) set a 2013 high at $25.98 on June 4 then traded as low as $22.63 on July 24. My annual value level is $19.60 with a weekly pivot at $23.60 and quarterly risky level at $25.38.

Coca Cola ($40.08) set a multi-year high at $43.43 on May 16 then traded as low as $38.97 on June 20. My annual value level is $24.96 with a monthly risky level at $41.02.

McDonald's ($98.08) set a multi-year high at $103.70 on April 12 then traded as low as $95.16 on June 6. My annual pivot is $99.38 with a weekly risky level at $101.26.

3M Company ($117.43) set a multi-year high at $118.59 on Wednesday. My quarterly value level is $92.40 with a semiannual pivot at $115.00 and a monthly risky level at $123.03.

Microsoft ($31.84) set a multi-year high at $36.42 on July 16 then traded as low as $31.02 on July 19. My annual value level is $28.57 with a weekly pivot at $32.30 and quarterly risky level at $33.52.

Procter & Gamble ($80.30) set a multi-year high at $82.54 on April 23 then traded as low as $75.10 on June 20. My quarterly value level is $75.68 with an annual pivot at $78.73 and semiannual risky level at $81.86.

AT&T ($35.27) set a multi-year high at $39.00 on April 23 then traded as low as $34.10 on June 21. My semiannual value level is $32.14 with a quarterly pivot at $36.27 and monthly risky level at $36.87.

United Technologies ($105.57) set a multi-year high at $106.55 on July 31. My weekly value level is $101.19 with a monthly risky level at $107.41.

Verizon ($49.46) set a multi-year high at $54.31 on April 30 then traded as low as $47.77 on June 3. My semiannual value level is $42.34 with a semiannual pivot at $49.86 and quarterly risky level at $51.28.

Wal-Mart ($77.94) set a multi-year high at $79.96 on May 15 then traded down to $72.90 on June 24. My monthly value level is $76.14 with a weekly pivot at $77.63 and quarterly risky level at $82.06.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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Source: http://news.yahoo.com/august-begins-highs-risky-levels-123200540.html

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