Stocks look overvalued at current levels

Despite a sell-off on Friday, the equities markets still were able to turn in an across-the-board gain for the week. Given that the major indexes have already posted a pretty impressive move to the upside, even adding anything to the recent levels is noteworthy. While Friday's selling pressure did take some of the wind out of the sails of a potentially stronger close for the week, it should be noted that the move higher on Wednesday and Thursday came on much stronger volume than the decline seen on Friday. While this isn't always an indication of market internals, it often times does denote that there is more interest in pushing stocks higher than lower.

Friday's weakness came on the heels of a weaker-than-expected GDP report. A decline in home building data was a drag on the GDP figures and this may have alarmed those market players who are concerned about the economy slipping into recession as we move into 2007. Keep in mind, there are still a number of so-called “expert” economists who feel the economy will enter a mild/brief recession as we kick off 2007. Data such as Friday's GDP report does tend to support this concept, especially given the rapid cooling off in the housing market we are seeing lately. While this is a traditionally weak time of year for the housing market, there is no denying that the declines in home sales and increases in inventory nationwide are having an impact. The question now becomes whether or not this spills over into the economy (in other words, the consumer) enough to throw things into recession. If future indications start to show that this could be the case, then it's very likely that stocks are overvalued at current levels.

Looking ahead, the upcoming week will include a number of important economic reports, not to mention plenty of earnings. As far as economic news, it will be important to monitor the data for any signs of a slowdown in either consumer spending or economic growth. Any signs which tend to support this idea of a recession (i.e. signs of a slowing economy or weakening consumer) will likely not be well-received. The equities markets have had quite a rally recently and have likely priced in a premium assuming that the economy will come in for a very soft landing, free of both inflation pressures and recessionary risks. Anything flying in the face of that notion could work to push the market towards a pullback in the near-term.

Please feel free to email me with any questions you might have, and have a great trading week!

Chris Curran started his trading career at the age of 22 with a national brokerage firm. He combines fundamental and technical analysis to get the big picture on the market. Chris has been trading for 15 years, starting full time in 1997, and has never had a losing year as a full-time trader.