Markets Not Priced for Terror Threat

With the five-year anniversary of the Sept. 11 tragedy a month away, the markets are becoming jittery over the potential for new terrorist attacks, like the plot British security officers thwarted Thursday to explode devices in carry-on luggage on flights to the U.S. from Heathrow Airport.

I appeared on CNBC's "Worldwide Exchange" and "Squawk Box" Thursday morning to discuss how markets might react to the events in London. With stocks shifting from a bull to a bear market because of faltering fundamentals and technicals, I believe that weakness could accelerate given an event that provokes additional or renewed uncertainties.

In an appearance on "Squawk Box" on June 23, when the threat against the Sears Tower in Chicago was thwarted, I made the argument that a terrorism discount was no longer built into the U.S. equity averages, given that the Dow Jones Utility and Transportation Averages were trading near all-time highs, and these sectors were both approximately 10% overvalued, according to my model.

The equity averages are more vulnerable today, given the increasing risks of an actual terrorist event. This has not yet been factored into the Dow utilities, which reached an all-time high of 440.38 on Aug. 2, with public utilities around 7.5% overvalued. However, the decline in the Dow transports may be worse than expected because of the heightening risk of a terrorist event. They will confirm a bear market if the average ends the month below 4442. If the transports test my annual support of 4029, they would be down 19.6%.

Today it's very easy to track the technicals for the Dow industrials, as the 200-day simple moving average is at 11,000. The weaker-than-expected employment report last Friday provided the catalyst for an open above my semiannual pivot of 11,266, and the high was 11,344, just shy of my monthly resistance level, 11,359.

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At the time of publication, Suttmeier had no positions in the stocks mentioned.

Richard Suttmeier is president of Global Market Consultants, Ltd., and chief market strategist for Joseph Stevens & co., a full service brokerage firm located in lower Manhattan. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University.