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January 6, 2011

VALUATION WARNING: Our models find that overvaluation is approaching

levels typically seen when a market correction is imminent. Overvalued
stocks now make up 65% of our universe and more than 33% of the
universe is calculated to be overvalued by 20% or more. 15 of 16 Sectors
are now calculated to be overvalued.

Valuation Warning
ValuEngine Model Calculations Show Overvaluation Hitting 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 market overvaluation
and overvalued by 20% or more figures have reached levels strongly correlated with
market corrections in the past.
Whenever we see levels in overvaluation levels in excess of @ 65% for the
overall universe and 30% for the overvalued by 20% or more categories, we issue a
valuation warning. ValuEngine issued a market valuation watch on December
15th. Since then the market has continued to climb and our models have only
increased the levels of calculated overvaluation.
Based on the latest model calculations, ValuEngine has issued a market
valuation warning. We reiterate again that this is a time for investors to keep a close
eye on the market, tighten their stop losses, book some profits, and hedge against a
move to the downside.
 This chart shows overall universe valuation in excess of 60% vs the S&P 500 from
the end of March 2010 to the present:

This chart shows universe overvalued by 20% or more levels in excess of 27% vs
the S&P 500 from the end of March 2010 to the present:
 In addition to the overall valuation metrics, we see that on a sector basis 15 of
16 sectors are calculated to be overvalued. As you can see from the chart below,
the level of overvaluation for many sectors has also increased since we issued our
valuation watch December 15th.

Sector 12/15/2010 1/6/2011

Aerospace 7.51% overvalued 11.69% overvalued
Auto-Tires-Trucks 14.28% overvalued 18.77% overvalued
Basic Materials 29.55% overvalued 33.10% overvalued
Business Services 6.52% overvalued 9.35% overvalued
Computer and Technology 7.22% overvalued 11.86% overvalued
Construction 5.94% overvalued 9.12% overvalued
Consumer Discretionary 6.24% overvalued 8.61% overvalued
Consumer Staples 11.45% overvalued 12.36% overvalued
Finance 7.25% overvalued 10.66% overvalued
Industrial Products 15.30% overvalued 18.73% overvalued
Medical 5.48% undervalued 1.36% undervalued
Multi-Sector Conglomerates 14.70% overvalued 18.52% overvalued
Oils-Energy 22.95% overvalued 29.29% overvalued
Retail-Wholesale 9.36% overvalued 11.19% overvalued
Transportation 12.04% overvalued 15.97% overvalued
Utilities 8.23% overvalued 9.30% overvalued
SP 500 1241.59 1276.56
VAL WATCH VAL WARNING

In the past, our Chief Market Strategist Richard Suttmeier has used the sector
valuation figures to buttress his macro market calls. Almost 14 of the 16 sectors are
calculated to be overvalued by 10% or more.
This is another indicator that stocks are no longer the bargain they were a few
months ago and that investors should consider implementing additional risk
management tools and/or booking some profits.
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. But as
you can see from the charts below, the overvalued indicator has been fairly robust
and thus must be considered as we move forward.
 This chart shows universe overvaluation figures in excess of 60% vs the S&P 500
from 1991 up until today:

This chart shows universe overvalued by 20% or more levels in excess of 30% vs
the S&P 500 from 1991 up until today:
 As you can see from the charts, in many cases in the past the spikes in
overvaluation--particularly the overvalued by 20% or more metric--provided a timely
signal of an impending correction.
Our most recent valuation watch occurred in late April 2010, just as the market
headed down for the Summer.
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overall downside risk to their portfolios. Richard Suttmeier's ValuTrader Newsletter
includes some hedging via the use of popular short ETFs and Suttmeier allocates
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MARKET OVERVIEW
Summary of VE Stock Universe
Stocks Undervalued 34.64%
Stocks Overvalued 65.36%
Stocks Undervalued by 20% 16.10%
Stocks Overvalued by 20% 33.01%

SECTOR OVERVIEW
Sector Change MTD YTD Valuation Last 12- P/E
MReturn Ratio
Aerospace 1.06% 0.77% 0.77% 11.69% overvalued 32.73% 20.24
Auto-Tires-Trucks 1.92% 1.82% 1.82% 18.77% overvalued 46.38% 26.92
Basic Materials 0.09% -1.47% -1.47% 33.10% overvalued 60.68% 37.7
Business Services 1.22% 0.80% 0.80% 9.35% overvalued 19.57% 30.13
Computer and Technology 1.24% 7.29% 0.97% 11.86% overvalued 32.16% 44.68
Construction 1.12% -0.32% -0.32% 9.12% overvalued 10.43% 38.56
Consumer Discretionary 1.18% 0.41% 0.41% 8.61% overvalued 24.16% 31.7
Consumer Staples -0.08% -0.76% -0.76% 12.36% overvalued 16.55% 27.94
Finance 0.92% 0.06% 0.06% 10.66% overvalued 19.26% 25.4
Industrial Products 0.35% -0.33% -0.33% 18.73% overvalued 29.54% 26.55
Medical 0.87% 0.50% 0.50% 1.36% undervalued 18.56% 37.85
Multi-Sector Conglomerates 1.00% 0.31% 0.31% 18.52% overvalued 32.09% 30.38
Oils-Energy 0.88% 0.10% 0.10% 29.29% overvalued 32.09% 42.11
Retail-Wholesale 0.81% -0.50% -0.50% 11.19% overvalued 60.52% 22.28
Transportation 0.87% 0.29% 0.29% 15.97% overvalued 27.63% 42.98
Utilities 0.15% -0.22% -0.22% 9.30% overvalued 12.52% 25.65