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April 28, 2011

VALUATION WATCH: Our models find that overvaluation is approaching

critical levels. Overvalued stocks now make up almost 62% of our universe
and 30% of the universe is calculated to be overvalued by 20% or more. All
Sectors are calculated to be overvalued.

Valuation Watch
ValuEngine.com Universe Overvaluation Figures Reaching Critical Levels
The ValuEngine Valuation Model tracks more than 5500 US equities, ADRs, and
foreign stock which trade on US exchanges. The model calculates a level of
mispricing or valuation percentage for each equity based on what the stock should
be worth if the market were totally rational and efficient--an academic exercise to be
sure, but one which allows for useful comparisons between equities, sectors, and
industries.
We track valuation figures and use them as a metric for making calls about the
overall state of the market. As of last night's close, our overall universe overvaluation
and overvalued by 20% or more figures have reaches levels which have been
correlated with market dips in the past.
Whenever we see levels in overvaluation levels in excess of @ 60% for the
overall universe and 27.5% for the overvalued by 20% or more categories, we issue a
valuation watch. ValuEngine has issued a market valuation watch as of today, April
28th. This is a time for investors to keep a close eye and the market and to consider
booking some profits and perhaps hedging against a move to the downside.
Our last Valuation Watch took place from March 30th to April 13th. We began
that Valuation Watch with the SP 500 at 1319 and saw it rise to 1335 before dropping
to 1314. At that time we saw our overall valuation figures approach the Valuation
Warning level of 65%-- but they peaked at 64.27%. Since that mid-April dip, the
market has resumed its upward climb.
 Below, we present the chart of our most recent Valuation Watches and
Warnings. The yellow line tracks the overall universe overvaluation figure when it is
above 60% and a Valuation Watch is on. The red bars show days where we issued a
Valuation Warning. The blue line is the SP 500 close.

We issue our latest Valuation Watch with the SP 500 at the 1355 level and the
overall universe valuation figure at 61.75%. The Valuation model constantly adjusts
itself to new earnings reports so valuation can come into line with new information--
thus a warning could occur at 1340 but not 1355 since the model has digested the
new earnings figures and may not find the individual equities as overvalued as they
once were in light of new fundamental data.
Of course, as always past performance is no indication of future
behavior. Given the wild gyrations of the markets over the past few years, it has been
tough to rely completely on any fundamentally or technically-based mode of
analysis. As always, shorting in a bubble can kill and must be utilized prudently.
In addition to the overall valuation metrics, we see that on a sector basis ALL
sectors are calculated to be overvalued. In the past, our Chief Market Strategist
Richard Suttmeier has used the sector valuation figures to buttress his macro market
calls. Almost half of the sectors are calculated to be overvalued by almost 10% or
more. This is another indicator that stocks are no longer a bargain and that investors
should consider implementing additional risk management tools and/or booking
some profits.
MARKET OVERVIEW
Summary of VE Stock Universe
Stocks Undervalued 38.25%
Stocks Overvalued 61.75%
Stocks Undervalued by 20% 16.36%
Stocks Overvalued by 20% 30.28%

SECTOR OVERVIEW
Sector Change MTD YTD Valuation Last 12- P/E
MReturn Ratio
Aerospace 0.19% -1.91% 13.41% 8.67% overvalued 18.14% 19.3
Auto-Tires-Trucks 0.62% 1.51% -0.78% 9.34% overvalued 31.76% 20.66
Basic Materials 0.84% 0.38% 1.53% 10.35% overvalued 46.35% 26.04
Business Services 0.67% 1.38% 7.21% 9.75% overvalued 10.00% 51.15
Computer and Technology 0.66% 2.31% 14.65% 9.95% overvalued 26.34% 46.14
Construction 0.14% -1.09% 1.93% 5.34% overvalued -0.82% 34.35
Consumer Discretionary 0.67% 2.76% 8.62% 6.96% overvalued 9.56% 33.67
Consumer Staples -0.27% -0.08% -0.41% 10.28% overvalued 13.87% 19.4
Finance 0.45% 0.17% 3.67% 7.64% overvalued 4.17% 26.13
Industrial Products 0.13% 0.58% 8.35% 10.11% overvalued 21.92% 30.62
Medical 0.88% 3.19% 15.86% 5.14% overvalued 13.42% 38.54
Multi-Sector Conglomerates -0.25% 0.71% 5.71% 16.31% overvalued 24.44% 30.81
Oils-Energy -0.27% -2.70% 10.43% 20.39% overvalued 35.95% 48.25
Retail-Wholesale 0.88% 2.23% 7.47% 8.22% overvalued 14.08% 29.64
Transportation 0.27% -0.35% 1.07% 13.49% overvalued 13.66% 22.13
Utilities 0.54% 1.54% 6.56% 12.61% overvalued 19.37% 21.73