Bears Run Amok in Market Prophet's Vision

What's with the number 200? Nothing magical, he says, except that it has worked to define levels of support and resistance in every major bubble and crash he has studied over the last 100 years. A bear market bounce in a stock index or commodity from its 200-month average to its 200-week average, he says, is relentless, takes about a year and ends with low volatility -- all characteristic of the recent U.S. rally.

Belkin abandoned his Nasdaq 2280 target because he noticed that money-supply growth had begun to contract as credit markets froze up -- an event that, in his words, has "drained the economy of bubble fuel."

In July, the three-month annualized rate of growth of money had reached a peak of 14%. But money-supply growth two weeks ago had fallen to 1%, and last week, according to Federal Reserve data, it actually turned negative.

Fed data show that banks are dumping their holdings of government bonds right and left; their Treasury holdings have dropped $100 billion since July.

Commercial lending has gone nowhere since July, and real estate lending has slowed dramatically. (A newsworthy example of the latter was a report last week that The New York Times had put off building its new headquarters tower in Manhattan for a couple of years because its development partner was unable to obtain financing.)

Belkin believes that the Bush administration essentially "rented the 2003 recovery from Wal-Mart" by cutting taxes and mailing out rebate checks, and now faces an "involuntary deleveraging process" that will feed into weaker corporate results, softer economic statistics, worsening unemployment and, eventually, a sharp decline in real estate values.

In his Oct. 12 report to clients, he warned that "deleveragings are not low-volatility events -- a financial market dislocation in the fourth quarter is likely." And in his Oct. 19 report he upped the ante, saying that "the contrast between bullish equity-market psychology and deteriorating private-sector credit conditions is bizarre," concluding: "The point of a bear-market rally is to make everyone bullish again just before the market does its next swan dive."

Control the Damage With 'Chicken Longs'

How will you know if he's right and not just another dour crank? Until now, every 5% decline in the broad averages this year has been met with buying at some identifiable level of support.

Back in August, it was the 960 area for the S&P 500, while in September it was the 1000 area. The next time the market sinks below an area of supposed support -- e.g., the 1015 area for the S&P 500 -- and stays below it for more than a couple of days, it could be lights out for the buy-the-dips crowd. And then a real liquidation could ensue.

It's worth noting for the record that while the Nasdaq hasn't reached its 200-week moving average quite yet, other indices and stocks are very close: For the Dow Jones Industrial Average, the 200-week moving average is at 9789; for chip giant Intel (INTC) it's at $32.81; for ExxonMobil (XOM) it's at $38.44.

Meanwhile, stocks that are the most extended above their 200-week moving averages after a year of rally -- and thus most ripe for a reversion to the mean -- are all the major homebuilders, such as Centex (CTX), Toll Brothers (TOL) and Pulte Homes (PHM); gold miners such as Newmont Mining (NEM); casino supplier International Game Tech (IGT); and security-software maker Symantec (SYMC).

In his latest report, Belkin told clients to shift from buying dips to selling strength to "avoid having egg on their faces during a fourth-quarter downturn." For mutual fund managers obligated to be long, he recommended they overweight defensive consumer stocks such as Colgate-Palmolive (CL) and Procter & Gamble (PG). He calls these "chicken longs" because he believes they will fall less than market benchmarks in a broad downturn -- although they probably won't provide positive returns.

Belkin's Long Picks for Damage Control* These names shouldn't fall as far as market benchmarks in a broad downturn
Stocks	Oct. 20 Price	Volume
Procter & Gamble (PG:NYSE)	$95.98	2,973,000
Colgate-Palmolive (CL:NYSE)	57.37	1,900,100
Church & Dwight (CHD:NYSE)	35.20	65,700
Dial (DL:NYSE)	22.00	501,100
PepsiCo (PEP:NYSE)	48.15	2,759,700
Coca-Cola (KO:NYSE)	45.61	4,271,800
Nike (NKE:NYSE)	63.85	1,386,200
Ashland (ASH:NYSE)	36.74	212,000
Amerada Hess (AHC:NYSE)	52.78	353,200
Wrigley (WWY:NYSE)	55.97	423,300
Unilever (UN:NYSE)	57.25	3,763,700
Hershey Foods (HSY:NYSE)	75.84	305,400
ConAgra Foods (CAG:NYSE)	23.49	2,404,700
McDermott (MDR:NYSE)	7.00	769,600
Hospitality Properties (HPT:NYSE)	37.01	191,000
Teco Energy (TE:NYSE)	14.05	948,900
AES Corp. (AES:NYSE)	8.25	1,103,900
FedEx (FDX:NYSE)	72.59	1,415,400
United Parcel Service (UPS:NYSE)	68.75	2,470,400
*Longs are expected to outperform the S&P 500 over the next one to three months, but are not expected to generate absolute positive returns. Source: MSN Money

Among his top shorts are the homebuilders, which he called "so overowned, overvalued and undershorted they're like Yahoo! at the top, but with fundamentals that are deteriorating every second under your eyes." Others on his list for short-sellers are cyclicals such as machinery makers Ingersoll Rand (IR), Cummins (CUM); chemical makers Eastman Chemical (EMN) and Hercules (HPC); Internet service or hardware providers such as eBay (EBAY) and Cisco Systems (CSCO); and retailers such as Kohl's (KSS) and Sears (S).

Belkin's Short Picks Homebuilders figure prominently on this list
Stocks	Oct. 20 Price	Volume
Kohl's (KSS:NYSE)	$51.58	6,431,400
General Electric (GE:NYSE)	28.78	16,078,700
Amgen (AMGN:Nasdaq)	61.89	18,340,112
MedImmune (MEDI:Nasdaq)	28.64	9,029,221
W.W. Grainger (GWW:NYSE)	45.75	903,400
Weyerhaeuser (WY:NYSE)	59.32	540,400
International Paper (IP:NYSE)	39.65	1,585,600
Millipore (MIL:NYSE)	40.45	878,400
Waters (WAT:NYSE)	28.14	1,221,800
Computer Sciences (CSC:NYSE)	39.69	646,100
Electronic Data Systems (EDS:NYSE)	21.33	1,970,300
Paccar (PCAR:Nasdaq)	78.30	712,500
Navistar International (NAV:NYSE)	41.30	748,000
Eastman Chemical (EMN:NYSE)	32.86	399,800
Hercules (HPC:NYSE)	10.23	588,500
Power-One (PWER:Nasdaq)	10.95	809,826
Toll Brothers (TOL:NYSE)	34.44	512,800
Omnicom (OMC:NYSE)	75.14	1,340,400
Monster Worldwide (MNST:Nasdaq)	25.28	1,195,286
Baxter (BAX:NYSE)	29.43	1,890,000
Medtronic (MDT:NYSE)	46.17	3,740,200
Raytheon (RTN:NYSE)	28.15	1,719,000
Micron Technology (MU:NYSE)	12.85	11,466,100
LSI Logic (LSI:NYSE)	9.41	3,603,300
Cisco Systems (CSCO:Nasdaq)	21.08	31,688,559
eBay (EBAY:Nasdaq)	56.60	12,423,137
Source: MSN Money

Naturally, one hopes Belkin has it wrong this time. But you have to admit that he does have the hot hand. I'll check in with him later this year as we learn whether his guidance was right, wrong or perhaps just early.

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